6 July 2017

How to minimise legal risks associated with labour contracting

Sam Cahill, Associate

Labour contracting can give rise to specific legal risks for a business that uses such an arrangement where non-compliance with employment obligations occurs. The Fair Work Ombudsman (“FWO”) has published a new guide that suggests certain steps businesses can take to minimize the legal risks associated with labour contracting.

What is labour contracting?

Labour contracting can be done in two different ways. The first way, which is commonly known as “labour hire”, is where a business (the “host”) engages a labour hire agency to provide workers – who are employed and paid by the labour hire agency – to perform work under the direction and control of the host business. The second type, which is often referred to as “outsourcing”, is where a business (the “principal”) engages a contractor to perform a certain task or function instead of having this task or function performed by its own employees. Under this arrangement, the work may be performed by the contractor’s employees or sub-contracted to another contractor business.

Legal Risks

The labour provider (often referred to as the contractor) – being the employer of the relevant workers – owes various legal obligations to its employees under the Fair Work Act 2009 (Cth) (“FW Act”) and any relevant Modern Award or Enterprise Agreement.

The host business is not immune from liability if a breach occurs. The FW Act provides that any party – including an individual or another business – who is “involved” in a breach of the FW Act is also taken to have committed the breach. This concept is known as “accessorial liability”. In the context of labour contracting, accessorial liability means that a host or principal business can be held liable for the failure of the labour provider to comply with its legal obligations.

Steps recommended by the FWO

In recent years, the FWO has sought to crack down on compliance issues arising with respect to labour contracting and other similar arrangements, and has relied on the accessorial liability provisions under the FW Act to establish liability on the part of a number of businesses.
Now, in a bid to improve understanding of these issues within the business community, the FWO has published its own guidance material on labour contracting. In short, the FWO suggests that a host or principal should take the following steps to minimise the legal risks associated with labour contracting and accessorial liability:

  • understand the pay and conditions that apply to the workers;
  • understand the workplace practices of a potential contractor (for example asking for information as part of the tender process);
  • ensure that the contract price negotiated is adequate to cover the wages and other entitlements for the relevant workers (keeping in mind that the contractor will also have overhead costs and will generally need to make a profit);
  • seek an undertaking from the contractor that it will comply with the FW Act (this can be done as part of the written agreement); and
  • require the contractor to notify or seek approval prior to engaging any sub-contractors.

Please contact us if you require any assistance regarding your labour contracting arrangements, including the implementation of the above recommendations.

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