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Federal Court to rule on alleged sham contracting this month

Federal Court to rule on alleged sham contracting this month

By Wisewould Mahony
September 16, 2015

Sham contracting arrangements are used by some employers to avoid legal obligations towards workers such as payment of payroll tax, workers compensation premiums, employee entitlements and superannuation contributions. Businesses found to have engaged in sham contracting are liable for significant pecuniary penalties under the Fair Work Act 2009 (Cth) (FW Act) sham contracting provisions.

The Fair Work Ombudsman (FWO) is responsible for investigating and prosecuting alleged sham contracting activities.

FWO pursues Ecosway Pty Ltd for alleged sham contracting in MLM industry

Later this month, the Federal Court will hear a case brought by the FWO against an international retail company, Ecosway Pty Ltd, for engaging Australian workers as independent contractors in its multi-level marketing (MLM) business.

Ecosway describes itself as an ‘international networking business’. The company sells and distributes a range of household products in stores across Australia as well as through a network of ‘business owners’ and ‘store operators’ who are engaged as independent contractors. As contractors, the sales persons are paid on a commission basis according to their sales of Ecosway products, rather than pursuant to a Modern Award.

After receiving a complaint from one of Ecosway’s store operators in Adelaide, the FWO commenced proceedings against Ecosway, arguing that Ecosway breached the sham contracting provisions under the FW Act by representing to the worker that she was an independent contractor, rather than an employee.

The FWO states that the worker should have been regarded as an employee and her employment covered by the terms of the General Retail Industry Award 2010 (Retail Award) because of the nature of the tasks performed and the level of control asserted by Ecosway over the worker’s activities. The worker was required to open and close Ecosway’s stores at specific times, display its stock as directed, sell its goods, bank the proceeds and regularly report to Ecosway management in respect of sales. A complaint was made to the FWO when the worker became concerned that she had been working over 45 hours per week for Ecosway for what amounted to less than the minimum wage.

It is alleged that Ecosway’s actions constituted numerous breaches of the sham contracting provisions under the FW Act, failure to pay the minimum wage and other breaches of the Retail Award and the NES. The company faces significant pecuniary penalties per breach as well as having to make a full back-payment to the worker for wages and other employee entitlements.

Interestingly, the case was initially brought before the Federal Circuit Court, however, it was transferred to the Federal Court for an ‘authoritative determination’ of the matter. The decision of the Court is also likely to have serious implications for Ecosway concerning agreements with its other Australian sales persons, as well as for other businesses currently engaging workers as independent contractors, particularly in the MLM industry.

Watch this space…

A further update will be published once the Federal Court’s decision is handed down.

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Our Employment & Workplace Relations department can also assist you with:

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  • Contractor agreements and issues.

For further information on the legitimacy of independent contractor arrangements or how sham contracting may impact your business, please contact Chris Pollard.