Sham contracting is an attempt by an employer to misrepresent or disguise an employment relationship as an independent contracting arrangement.
Employers may do this to avoid having to give an employee their proper work entitlements, such as minimum rates of pay and leave entitlements.
Sometimes, employers dismiss, or threaten to dismiss, employees if they don't agree to become independent contractors. This is against the law.
What's an employee & what's an independent contractor?
There are a number of indicators to help tell the difference between an employee and an independent contractor.
Note: No single point below makes a person either an employee or independent contractor.
- Perform work, under the direction and control of their employer, on an ongoing basis
- Generally work standard or set hours
- Bear no financial risk (this is the responsibility of their employer)
- Are entitled to have superannuation contributions paid into a nominated superannuation fund by their employer
- Have income tax deducted by their employer
- Are paid regularly (e.g. weekly / fortnightly / monthly)
- Are generally entitled to get paid leave (e.g. annual leave, personal / carer's leave, long-service leave) if they are a permanent employee.
- Decide how to carry out the work and what expertise is needed to do so
- Bear the risk for making a profit or loss on each job
- Generally pay their own superannuation and tax, including GST
- Generally have their own insurance
- Are contracted to work for a set period of time (for example, 2 months), or to do a set task
- Decide what hours to work to complete the job
- Generally submit an invoice for work completed or are paid at the end of the contract or project
- Do not get paid leave.
What’s the difference?
No single point makes a person either an employee or an independent contractor, it requires an overall assessment of all the factors.
Fair Work Inspectors may take an employer to court if they find the employer is involved in sham contracting.
If you're in the building and construction industry, Australian Building and Construction Commissioner (ABCC) Inspectors may also take court action for sham contracts.
The courts may order the employer to pay a penalty of up to $33,000 per contravention.
Recent FWA Investigations
Late last year FWA released the findings of their audit into sham contracting in the cleaning services, hair and beauty and call centre industries.
The report states that a number of trading enterprises engaged contractors who should more properly have been classified as employees. The Fair Work Ombudsman found misclassification of employees in each of the three industries that were investigated, but does not believe the problem is confined to these industries alone.
While Fair Work inspectors found that most of these arrangements were not deliberate, they did identify a number of employers whom they believe knowingly or recklessly misrepresented the employment relationship to their workers as one of independent contracting.
A number of employers had received advice from accountants on how to structure their operations. It appeared the legality or appropriateness of the arrangements under relevant workplace laws was often not considered.
From our perspective the easiest way to avoid Sham Contracts is to engage your prospective contractors compliantly from the start.