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The perils of sham contracting

September 9, 2015

contract

Do you use independent contractors? Could you be accused of sham contracting? What happens if you get caught?

There is little doubt that regulators such as the Fair Work Ombudsman (FWO) have been placing increased focus on sham contracting in the last few years. If you are successfully prosecuted for contravening the sham contracting provisions of the Fair Work Act 2009 (Cth), you could face a heavy fine.

As a result, it would be wise to check you are not breaking the rules around retaining the services of independent contractors.


What is sham contracting?

Sham contracting is where an employer inappropriately misrepresents an employment relationship as an independent contracting relationship.

It is usually done to avoid paying employee entitlements such as:

  • superannuation
  • workers’ compensation
  • leave
  • certain taxes.

It is worth noting at this point that sham contracting is unlawful.

The Fair Work Act protects genuine employees from sham contracting arrangements and also outlines employers’ obligations when establishing an employment relationship.

Under the sham contracting provisions of the Fair Work Act, an employer cannot:

  • claim an employee is an independent contractor
  • say something false to convince an employee to become an independent contractor
  • dismiss, or threaten to dismiss, an employee if they don’t become an independent contractor
  • dismiss an employee and hire them as an independent contractor to do the same work.

In addition, an employer can be heavily fined for contravention of these provisions. You may also be ordered to pay compensation to the person for any loss they suffered as a result of your conduct.


Are regulators getting tougher on sham contracting?

There is little doubt that regulators are getting tougher on sham contracting. There is also evidence that the courts are willing to impose tougher penalties on businesses found to be engaging in sham contracting.

FWO inquiry into Victorian Government hiring practices

In March 2015, the FWO completed its inquiry into the Victorian Department of State Development and Business Innovation’s labour hire and independent contractor arrangements.

Although the FWO did not find the Department had engaged in sham contracting, it noted that the Department had, in an attempt to save money, engaged in practices that led to a ‘heightened risk’ of it contravening the sham contracting provisions under the Fair Work Act.

As a result, the FWO recommended that the Department conduct an ‘urgent, comprehensive review of its policies and processes’, and provided a list of the areas that needed to be investigated. It also asked the Department to report back in six months.

Recent cases on sham contracting

In a recent case on sham contracting, the Federal Circuit Court imposed total penalties of $313,500 against Linkhill Pty Ltd, a company within the Roy Morgan Group, because it had deliberately engaged in sham contracting and also failed to show contrition for its behaviour. The court noted that it decided to show its disapproval by setting penalties at a ‘meaningful level’.

The Federal Court took a similar position regarding two Gold Coast travel businesses found to have engaged in sham contracting, and fined them $139,590. Again, the court commented on the seriousness of the contravention.

How can you protect your business from allegations of sham contracting?

Here are our five basic tips on how to avoid an allegation of sham contracting.

Tip No. 1: Understand the difference between employees and independent contractors

You need to ensure you understand the difference between employees and independent contractors. This includes making sure you are aware of the factors that need to be considered in correctly characterising a worker as an employee or an independent contractor.

Tip No. 2: If you engage independent contractors, make sure your policies, agreements and practices are compliant

If you engage independent contractors, or are intending to engage independent contractors to perform work previously performed by employees, you will need to review your current engagement policies, agreements and practices to ensure they are compliant.

Tip No. 3: Do not mislead an employee in order to persuade them to become an independent contractor

You must not make a false statement to a current or former employee, with the intention of persuading them to become an independent contractor to perform the same, or substantially the same, work for you.

Tip No. 4: Do not threaten or dismiss an employee in order to hire them as an independent contractor

You must not dismiss, or threaten to dismiss, an employee who performs particular work for you, in order to re-engage them as an independent contractor to perform the same, or substantially the same, work for you.

Tip No. 5: Just because a worker looks and acts like an independent contractor, this doesn’t mean they are one

You cannot assume that just because a worker has an ABN and provides invoices for their services that they are an independent contractor.

Are you an HR Assured client? Do you use independent contractors? Are you concerned you may have breached the Fair Work Act’s sham contracting provisions? Or do you simply want some more information on issues surrounding using independent contractors? If so, feel free to call our Telephone Advisory Service.