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The perils of sham contracting
Policies, Procedures & SafeguardsSeptember 30, 2013
The Fair Work Act 2009 (the Act) protects genuine employees from being subject to sham contracting arrangements and in recent years there has been a heightened focus from both the Fair Work Ombudsmen and the Australian Tax Office to crack down on businesses that subvert these protections – ignorance is no defense.
With an increasing number of businesses seeking flexible workforces and a general unfamiliarity with the Act’s sham contracting provisions, the dangers of non-compliance have never appeared larger. This article looks to shed some light on this thorny issue.
What exactly is sham contracting?
A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contracting arrangement. This is typically done by employers to avoid their obligations to their employees, including minimum pay rates, superannuation, leave and other employment entitlements as well as responsibility for workers’ compensation insurance.
Accordingly, the Act’s sham contracting provisions make it illegal for employers to:
Sham contracting is a serious matter because it can lead to employees being denied their rightful workplace rights and entitlements and so contravention of these provisions can result in heavy penalties being imposed by the authorities. Penalties include but are not limited to a maximum penalty of $33,000 for each contravention, compensation payments to each employee for any loss they have suffered as well as injunction and reinstatement orders.
The above demonstrates how important it is for employers to clearly define working arrangements from the very beginning, to avoid serious legal action arising at a later time.
Unfortunately, distinguishing between who is an independent contractor and who should be an employee is not straightforward. The problem with this area of the law is that such distinctions can be a bit grey. As every work arrangement is unique there is no single factor which will definitively indicate what the nature of the relationship is. Contrary to popular belief, just because a worker has an ABN or invoices for payment does not automatically mean they are an independent contractor.
The authorities will look at the totality of the relationship between the parties when determining whether an individual is an independent contractor or an employee. Case law suggests that the following are key assessment criteria:
Degree of control
Length of engagement
Misconduct or underperformance
Tools, equipment and uniform
Tax and superannuation
Method of payment
Steps to take now
Employers are advised to take the following steps, if they have not already done so, to avoid potential liability under the Act:
Ensure your recruitment managers are appropriately trained to correctly identify suitable contracting arrangements and understand the operation of the sham contracting provisions under the Act.
Stuart Chan, Documentation Consultant – Paralegal