What is sham contracting?
Sham contracting describes where an employer treats an employee as an independent contractor in order to avoid having to meet its obligations to that employee under employment laws.
It 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.
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 the hours of work
- can assign or delegate (subcontract) the work to others outside the organisation
- are paid on a fixed price basis payable at the completion of the task
- may supply special equipment or tools to do the job
- pay a significant proportion of the business expenses from their own income or are paid without income tax deducted
- 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 for legal and tax purposes, particularly if everything else points to them being an employee. 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 engaging them as an independent contractor
- make a knowingly false statement to persuade or influence an employee to become an independent contractor
What are the consequences of 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 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 2018, 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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