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Sham contracting

09 May 2017

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If you follow the national media, you will see a fair bit of commentary around sham contracting at the moment.

It starts with understanding the two most common forms of labour arrangements. 

The first is as an employee. Employees have an enormous amount of protection at law with respect to entitlements, awards and security of position. Their employer must also account for their superannuation and remit the employee’s PAYG tax to the Australian Taxation Office. 

The second is as a contractor. Contractors are a much easier thing to manage. They just invoice their fee plus GST and it is essentially all over.

Sham contracting is when you call someone a contractor when really they are an employee. In doing that you notionally remove all of the rights the person would otherwise be entitled to as an employee.

A person is not a contractor just because they give you an invoice with an ABN. If it walks like a duck and quacks like a duck, it is a duck, even if you call it a chicken. It is crucial that potential employers understand the difference between an employee and a contractor and don’t think that just calling someone a contractor means they are one.  Engaging someone as a contractor when they are actually an employee can be incredibly costly (especially over time). 

This is one of those areas of law where there is lots of grey. 

It is not always easy to work out whether someone is an independent contractor or is really an employee.

Whilst you always need to look at all of the circumstances of the engagement, as a general rule of thumb:

An employee generally… An independent contractor generally…
Works for one employer and must perform their duties personally  Offers their services to a broad range of customers and can subcontract the work
Works under the control and direction of their employer

Determines how they will carry out the work 

Works set hours / times as determined by their employer and has to ask permission for time off work  Decides when they will perform the work 
Is paid regularly based on the number of hours they work Gets paid a set amount for completing a job and is paid on provision of an invoice 
Does not provide any tools or equipment and is reimbursed for any expenses they incur in their employment

Provides most of the tools and equipment needed to perform the job

Carries no risk associated with the performance of their work Bears the risk associated with their work (ie liability for loss, damage or defective work) and stands to make a profit or a loss
Gets superannuation paid by their employer and their employer withholds income tax Is responsible for their own superannuation and income tax

The above list is not exhaustive and different tests apply for different purposes. There are obviously times where some aspects of each list can apply to the same role.

The ATO has an online self-assessment tool which may also be helpful in working out whether or not a person is an employee or contractor for income tax and superannuation purposes.

Why does it matter whether a person is an employee or an independent contractor?

Employees have different entitlements under legislation compared with independent contractors and businesses have different obligations towards employees than they do to independent contractors.

If a business engages a person as an independent contractor when really they are an employee, the business could find that it is exposed to claims for underpayment of wages, unpaid annual and personal/carer’s leave, additional taxation and superannuation. There may also be insurance and workplace health and safety ramifications.

What happens if we get it wrong?

It can be very costly if you engage someone as an independent contractor when really they are an employee. In these situations, there is a high risk that the person will have rights to make claims against you for unpaid wages, leave entitlements and superannuation. In circumstances where you have terminated an independent contractor, you might also find that they try to bring an unfair dismissal claim or some other legal claim that typically only employees can bring.

In addition, if the Fair Work Ombudsman gets involved you could be prosecuted and fined for sham contracting.

Obviously, the longer the sham contracting arrangements continue, the greater the potential liability as entitlements accrue and are not paid. 

What should you do?

It is important to be clear from the outset how you are engaging a person and to ensure that the documentation and work practices reflect this relationship.

To help avoid risks in this area, you should seek advice on:

  • whether or not your independent contractors are genuine contractors or whether they could be found to be employees;
  • ways in which to reduce the risk of your contractors being found to be employees; and
  • your contactor agreements to make sure that they are drafted in the best way to protect your business.

At Hynes Legal, our Employment and Workplace relations team can help you with all of the above.

The starting point is a written contract. If you engage workers (as contractors or employees) and do not have a written contract in place, it is always more difficult to establish the true nature of the relationship if there is a dispute. If you don’t already have documentation in place, we can assist by providing employment contracts and contractor agreements to fit your circumstances.

The law relating to industrial relations has been a bit of a political football over the past decade. Don’t let a small issue become a large one by ignoring the true nature of the people engaged by you in your business.

Contact us by clicking here.