What if your sham contractor overpays?

Linkhill Pty Ltd v The Director of the Fair Work Building Industry Inspectorate [2015] HCA Trans 340 (11 December 2015)

The High Court has refused to resolve a conflicting authorities in the law regarding treatment of payments over award in sham employment contracts.

The High Court[1] has refused special leave to appeal a Full Court decision of the Federal Court[2] which found there was confusion in the law of how to treat payments over award in sham employment contracts. Three members of the Federal Court all conceded there was a difference of opinion on the law needing to be resolved regarding the legal principle known as ‘set off’.[3] The principle was wrongly applied at first instance by the Federal Circuit Court in a sham contracting prosecution by the Fair Work Building Industry Inspectorate against Linkhill Pty Ltd resulting in fines and compensation orders, notwithstanding that the workers had been paid well in excess of their award entitlements. Three of the best paid workers had been paid an over award average of $92,683 over two years. The law as applied by the federal Circuit court saw these and seven other workers not only awarded compensation for “underpayment” by Linkhill, but also fines against Linkhill totalling $313,500 for breaches regarded as “serious”.[4]

The Full Court recognized there was a clear conflict in legal principles applicable to “failed contracts for services” – namely independent contract arrangements found by the Courts to be in truth employment relationships. Two lines of case authority conflict on whether a bald hourly rate paid without regard to any award can be applied to reduce or be ‘set off’ against an award debt comprising multiple entitlements arising when the independent contractor is found to be an employee with award entitlements.

The first line of authority is that established by Ray v Radano [1967] AR (NSW) 471 and Poletti v Ecob (No 2) (1989) 31 IR 321 and confirmed in Australia and New Zealand Banking Group Limited v Finance Sector Union of Australia (2001) 111 IR 227;[2001] FCA 1785. It has been applied to mean that unless there “a close correlation between the nature of the contractual obligation and the nature of the award obligation” in effect, “purposive overlap”, payment under the former cannot be applied to or set off against the latter. In short payment of a bald over award bald wage won’t allow you to apply the surplus over award against a debt of, say, under paid meal allowance. The second line of authority established by James Turner Roofing Pty Ltd v Peters (2003) 132 IR 122;[2003] WASCA 28 says the opposite. The Full Court in Linkhill noted the paradox of the principle as stated by James Turner having the same roots in Radano. Indeed the Judge in James Turner effectively quoted Radano word for word:

If no more appears than that (a) work was done; (b) the work was covered by an award; (c) a wage was paid for that work; then the whole of the amount paid can be credited against the award entitlement for the work whether it arises as ordinary time, overtime, weekend penalty rates or any other monetary entitlement under the award.

Notwithstanding the authority of the full court decisions in support of the first line of authority it is clear the authority of James Turner is correct at first instance by reason of the absurd outcomes it prevents. An employer avoiding the administrative burden of large number complex entitlements might pay considerably over the hourly rate so as to exceed the total amount payable under the award. Under the Polleti line of reasoning the excess paid over total award entitlement could be 100% or 500% and the employer would still be bound to “compensate” the employee for failure to pay entitlements, ie meal allowance uniform allowance etc. That is because a strict principle is being applied. As Anderson J in James Turner said of the decision being appealed from before him which ruled that not even the hourly wage could not be set off against the hourly award rate and thus a double payment was being sought by the employee: “justice and the law would have parted company”. The logical flow on is: why should only a set off of ordinary award hours and hours paid under contract be allowed on the basis of being obviously fair? Money is fungible. Giving it this badge, designation or that is irrelevant for the purposes of the so-called victim whom the law is trying to protect from underpayment.

Comment

In fact the conflict between the Poletti and James Turner lines of authority is not confined as suggested by the Full Court[1] to situations “… where the parties have created a relationship different to that which, subjectively, they had set out to make”[2], namely independent contractor arrangements found in truth to be employment relationships. It applies to employment relationships where ever an employer has simply set a bald global wage that is purposely intended not to apply to any award entitlement. That was the situation in Polleti, Radano and Logan v Otis Elevator Co Pty Ltd (1999) 94 IR 218; [1999] IRCA 4. With millions of Australians either in independent contractor relationships or on awards the confusion in the law requires immediate legislative amendments to the Fair Work Act. The High Court refused leave on grounds including an insufficient error in the Court below, no principle of public importance, the case is not being appropriate vehicle for consideration of the difference of opinion.

[1] Linkhill Pty Ltd v The Director of the Fair Work Building Industry Inspectorate [2015] HCATrans 340 (11 December 2015)

[2] Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate [2015] FCAFC 99

[3] At [98 -99], [125]

[4] The Director of the Fair Work Building Industry Inspectorate v Linkhill Pty Ltd (No.9) [2014] FCCA 1124 (20 June 2014)