HR managers and Heads of HR are often at the frontline when it comes to workforce classification, contract design, and compliance. The Federal Court decision in Fair Work Ombudsman v Doll House Training Pty Ltd (No 2) [2024] FCA 811 offers a timely reminder of the risks when organisations misclassify employees as independent contractors.
Fair Work Ombudsman v Doll House Training Pty Ltd (No 2) [2024] FCA 811
In this decision, the Federal Court found that Doll House Training Pty Ltd engaged in sham contracting when it terminated or threatened to terminate three (3) employees and re-engage them as “independent contractors” performing the same work.
Between August and October 2020, the business had hired three (3) workers through a disability employment services provider to carry out research and presentations on robotics and health technology for the development of an app. Soon after, each worker received an “Independent Contractor Agreement” requiring them to obtain an ABN and submit invoices.
Although two of the workers signed the agreement, the Court held that the arrangements were in substance contracts of employment.
The workers:
- continued performing the same duties,
- were under direction and control,
- did not have the ability to delegate their work or operate an independent business.
The company also failed to pay them monthly as required and did not comply with a Fair Work Inspector’s Notice to Produce.
The Court imposed total penalties of $197,000 against the business and its director.
Key lessons for HR
- Substance over form
The Court reaffirmed that labels do not determine the legal status of a working relationship. Even if a contract calls someone an “independent contractor,” what matters is the reality of how work is performed and who controls it, who bears the risk, and whether the worker operates a business of their own.
- Power imbalance and vulnerability
The case involved workers with disability, which the Court recognised as heightening the seriousness of the conduct. HR leaders must be especially cautious when engaging individuals from vulnerable groups to ensure there is no coercion or unfair pressure to accept a particular form of contract.
The Court made it clear that a power imbalance will play a part in terms of the circumstances to consider whether there is sham contracting in play.
- Misclassification breaches multiple sections of the Fair Work Act
Sham contracting contravenes sections 357 and 358 of the Fair Work Act 2009 (Cth) prohibiting misrepresentations that an employment contract is a contract for services and prohibiting dismissing or threatening to dismiss employees to re-engage them as contractors.
- Classification issues often hide wider compliance problems
In this case, misclassification coincided with failures to pay wages correctly and to comply with a regulator’s notice. HR teams should recognise that sham contracting rarely exists in isolation, it usually points to broader systemic compliance risks.
- Deterrence and reputational harm
The penalty of $197,000 demonstrates that sham contracting will attract serious consequences. Beyond fines, organisations risk reputational damage, especially where vulnerable workers are involved.
Practical steps for HR Managers and Heads of HR
Review engagement models
Audit your workforce for individuals engaged as contractors who might, in reality, be employees. Look for red flags such as close supervision, set hours, performance management, a change from employment to contractor or exclusive service to your organisation.
Ensure contracts match reality
If you genuinely intend to engage a contractor, ensure the contract reflects a commercial arrangement: ability to subcontract, assumption of risk, and payment for a result not simply hours worked.
There is nuance to this so if it gets complicated seek advice. In practical terms, a contractor agreement should not be provided by a consultancy or non law firm. Contractor Agreements and sham contracting carry serious risk and a lawyer (preferably an employment lawyer) should be advising on whether there is a genuine contactor relationship in place.
Train managers and HR staff
Educate your HR and hiring teams on how to distinguish between an employee and a contractor. Missteps often occur during recruitment or contract renewals, not just in payroll.
Protect vulnerable workers
Be especially vigilant when dealing with workers referred through disability or employment service providers. Ensure engagement terms are fair and that workers are informed of their rights and options.
Comply with pay and record-keeping obligations
Make sure everyone performing work under an employment-like relationship receives payslips, superannuation contributions, and proper entitlements. Maintain accurate time and pay records.
Document your decision-making
When deciding to classify a worker as a contractor, document your reasoning, factors considered, and advice received. This record can be invaluable if challenged by the Fair Work Ombudsman.
Final thoughts
For HR leaders, the Doll House Training decision is a wake-up call. The Federal Court made clear that organisations cannot rely on form over substance. If workers look and operate like employees, they probably are employees regardless of what their contracts say.
Sham contracting can quickly escalate from a technical breach to a major reputational and financial issue. A proactive HR team, regular compliance reviews, and informed contract design are your best defences.
Our Employment Lawyers at South Geldard Lawyers have essential expertise in advising on contractor arrangements and sham contracting.
Feel free to reach out on 07 4936 9100 or via email to Jonathan Mamaril, Director at jmamaril@southgeldard.com.au. All Employers receive an obligation free consultation.
