This factsheet will introduce you to the concept of “sham contracting” and explain the Fair Work Act’s prohibition on sham contracting.

What is “sham contracting”?

“Sham contracting” describes where an employer falsely treats an employee as an independent contractor in order to avoid having to meet its obligations owed employees under workplace law.

Sham contracting is prohibited under the Fair Work Act.

What is the difference between an independent contractor and an employee?

It can sometimes be very difficult to say whether someone is an employee or an independent contractor.

In general, some of the characteristics of an independent contractor are that they:

  • Are running their own business;
  • Control the way their work is to be done;
  • Control their hours of work;
  • Can assign or delegate (sub-contract) their work to others outside the organisation;
  • May be paid on a fixed price basis payable at the completion of the task;
  • May supply their own special equipment or their own tools to do the job;
  • Pay a significant proportion of the business expenses from their own income or are paid without income tax deducted; and
  • Directly profit (or suffer losses) from the business.

The fact that a written contract describes someone as an independent contractor does not necessarily mean they are indeed an independent contract for legal and for tax purposes, particularly if everything else points to them being an employee (if it looks, walks and quacks like a duck, then in all likelihood it is a duck no matter what it being called)Sham contracting is an example of this.

More information about the distinction between an independent contractor and an employee can be found on the Fair Work Ombudsman’s website here.

How does the Fair Work Act prohibit sham contracting?

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

  • Misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement;
  • Dismiss or threaten to dismiss an employee for the purpose of then re-engaging them as an independent contractor; and

Make any knowingly false statements to persuade or influence an employee to become an independent contractor.

What are the consequences of sham contracting?

If an employer is found to have engaged in sham contracting, the employer will usually be required to compensate the employee for any unpaid entitlements (which at a minimum is the difference between what they received as a contractor, compared to what they ought to be have been paid as an employee), plus interest. These amounts can be significant, particularly where there are many workers involved, or where the sham contracting has lasted a long time.

The Fair Work Act also provides penalties for contraventions of the sham contracting provisions and for breaches of minimum employee entitlements. As at 2019, for each contravention, the employer may be liable to pay a penalty of up to $12,600 per breach if they are an individual, or $63,000 per breach if they are a corporation. Usually multiple breaches are involved in sham contracting cases.

If an employee believes they are part of a “sham contracting” arrangement, the employee can complain to the Fair Work Ombudsman, who can pursue the employer for penalties. Alternatively, the employee can file a general protections application in the Fair Work Commission, and the matter would then be conciliated, failing which the employee would have to apply to the Federal Circuit Court or Federal Court of Australia for redress.

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