Ask Our Specialist – Sham Contracting and How to Avoid it

Employee or Independent Contractor?

News that the Fair Work Ombudsman is cracking down on ‘sham contracting’ has shone a spotlight on the practice. It’s an important test case in the so-called ‘gig economy’, and could have widespread repercussions for small and medium businesses who regularly employ independent contractors.

The rights and responsibilities for employees and independent contractors tend to differ drastically. As an employer, it is important to know if your worker is an employee or independent contractor as the employment laws that apply to each group will be different.

What is Sham Contracting?

In simple terms sham contracting is when a company deliberately disguises an employee/employer relationship as an independent contracting arrangement. Sham contracting frequently occurs in situations when companies need labour, but don’t want the responsibility of paying for employee entitlements such as leave, workers’ compensation and superannuation.

What is the Difference Between an Employee and an Independent Contractor?

An employee is a person employed to perform work for wages or salary. This arrangement is often referred to as a contract of service.

In contrast, an independent contractor is engaged on a contract for services. That is, they are typically engaged to achieve a result, which is ordinarily completed for a set fee. Independent contractors usually operate their own business and generally have high levels of control over how work is performed.

How do I know if a person is an employee or an independent contractor?

There are many factors which contribute to determining what makes an employee and an independent contractor. Each arrangement will turn on its own facts, balancing the various factors against each other to determine whether an individual is engaged as an independent contractor or an employee.

Control

An employee will often be closely managed, or receive clear directions from a supervisor or employer; whereas an independent contractor will be more autonomous. This type of test will look at how much direction the individual has over their day to day work.

Hours of Work

An employee will generally work standard or set hours, while an independent contractor decides what hours to work to complete a specific task or project.

Expectation of Work

An employee usually has an ongoing expectation of work and may have specific Key Performance Indicators and long terms goal they are required to achieve as part of their employment. By contrast, an Independent Contractor is generally engaged for a specific project or task.

Risk

An employee bears no financial risk as part of their employment, this is the responsibility of their employer. An Independent Contractor bears the risk for making a profit or loss on each task or project they deliver. They also usually bear the responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.

What do employers need to keep in mind when hiring employees or engaging independent contractors?

The Fair Work Act is quite clear about sham contracting arrangements and what employers are not able to do. This includes:

• An employer cannot tell an employee that he or she is an independent contractor.
• An employer cannot dismiss or threaten to dismiss an employee in order to engage them as an independent contractor to do the same (or mostly the same) work they performed as an employee and vice versa.
• An employer cannot mislead an employee (or former employee) in order to persuade them to perform the same (or mostly the same) work as an independent contractor.

Any of the above behaviour is considered illegal and an employer could find themselves being pursued by the Fair Work Ombudsman.

Is it possible for a company to accidentally engage in a Sham Contracting arrangement?

Yes, it is. A contractor who may have been engaged to deliver services on an ongoing basis could potentially be an employee in a legal sense, regardless of the nature or understanding of the working relationship. If you are hiring independent contractors on an ongoing basis, it’s best to get advice and clarify where you stand. Call us on 1300 651 415.