How employers can meet the Service Contractor Exemption

Australian employers seeking to keep outsourced work outside the Fair Work Act's "same job, same pay" regime are being urged to overhaul how they structure and run service contracts, as tribunals continue to apply a narrow test to the Service Contractor Exemption.

In an insight, Mallesons said that, in the current landscape, the closer an arrangement looks, feels, and is priced like embedded labour within the host's enterprise, the more likely a Regulated Labour Hire Arrangement (RLHA) Order will be available. 

By contrast, the more an arrangement operates as a "genuine, specialist, independently delivered service" using the provider's own equipment, systems, and standards, the more likely the exemption will bar an order, the firm said.

The guidance follows the Fair Work Commission's decision in March to reject an application for an RLHA Order over cleaning work at Bartter Enterprises' poultry facility, finding the work was the provision of a service rather than the supply of labour. 

Practical measures for employers

Mallesons uses that ruling to spell out practical measures for employers and hosts seeking to rely on the Service Contractor Exemption.

The firm's first warning is that labels are not enough: contracts and on‑the‑ground practice must both support a service character.

"Both contractual form and the practical reality of the relationship are important when considering the purpose of an arrangement," Mallesons said in its insight. 

"Contracting arrangements should demonstrably deliver outcomes that are meaningfully beyond simply supplying labour into the host's operations, both contractually and in practice."

That means clearly defining a service outcome and placing responsibility for delivering that outcome on the contractor, including the supply of workers, equipment, training and supervision. 

If, in reality, host supervisors manage rosters, assign daily tasks, and review performance as if contractor staff were part of the in‑house workforce, the arrangement is more likely to be viewed as labour hire.

Mallesons singled out embedded workforce models as a particular danger. 

"Service models where the provider's employees are embedded within the host's ordinary workforce are higher risk," it said. 

In such cases, contractor personnel may be indistinguishable from the host's employees in how they are deployed, controlled and integrated into operations.

Control and systems are another critical fault line. The firm said "practical control should sit with the provider as far as possible including day‑to‑day direction, supervision, rostering, tasking and quality review." 

Where host managers effectively run the contractor's staff, the arrangement will tend to resemble labour supply, regardless of what the contract states.

Mallesons also pointed to the tools and infrastructure used to perform the work. 

"Workers should use the provider's systems, plant, and structures where possible, particularly when the plant and structures are specialist to the services being provided," the firm advised. 

In the Bartter case, the contractor's use of its own specialist cleaning equipment, chemicals and processes was one factor supporting a finding of a genuine service.

Pricing structures are equally central. Mallesons described models where pricing arrangements are driven largely by the cost of labour as higher risk. These resemble traditional labour hire arrangements in which the host is effectively paying for headcount and hours.

By contrast, the firm said pricing that expressly reflects service delivery, such as fixed fees for scope or outcomes," is more consistent with the Service Contractor Exemption.

The analysis comes against a backdrop of continuing RLHA applications and orders under the Closing Loopholes reforms, and a judicial approach that has "narrowly interpreted" the Service Contractor Exemption to date.

While the Bartter ruling shows that a well‑structured and genuinely independent service model can avoid an order, the firm advised employers that only arrangements which clearly satisfy these criteria, on paper and in practice, are likely to fall on the safe side of the line.