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The risks of sham contracting.
Policies, Procedures & SafeguardsAugust 9, 2017
As a Business Development Manager, I speak to business owners every day about their concerns. I’ve noticed that independent contracting is an area that’s often misunderstood by employees.
There may be many reasons an employer chooses to engage an individual as a contractor instead of an employee, however a willingness by both parties to engage in this agreement is not sufficient for the arrangement to be legal. Sham contracting is when an employer or business tries to disguise an employment relationship as one of independent contracting, usually to avoid paying employee entitlements
When an employer or business engages a worker as an independent contractor to deliberately avoid paying that individual for the entitlements they should receive as an employee.
For example, a plumbing business engages a plumber as an “independent contractor” However, the “independent contractor” works regular systematic hours, has a job title, doesn’t work for anyone else, and wears the company shirt to work every day. Is the plumber truly an independent contractor?
There are some common examples of this happening including:
The penalties for sham contracting are $10,800 for an individual and $54,000 for a body corporate, with added compensation costs if the worker is found to have suffered financial loss. Additionally, if an independent contractor is determined to be an employee following investigation, unfair dismissal laws apply. The FWC has the power to reinstate the employee, or award compensation, should it be determined that they were unfairly dismissed.
The degree of control an employee has over his or her work is one of the main determinants in defining an employee relationship. An employee performs work tasks under the direction of an employer. An independent contractor on the other hand, is autonomous, managing their own projects in line with a brief.
An employee has set hours of work, although a casual employee could have some variance from week to week. An independent contractor will have an agreement in place with the employee that is task or project based, rather than hours based.
An employee will have an ongoing expectation of their work while an independent contractor usually has a specific task with a specific time frame to finish the task.
An employee will be provided either tools, equipment or an allowance for tools, or equipment to assist them in their job. An independent contractor in contrast provides their own tools and equipment and would not be paid an allowance for tools or equipment.
An employee will be taxed by the employer. Independent contractors instead arrange their own tax and GST.
An employee is covered under the employer’s insurance however an independent contractor is responsible for their own insurance.
An employee is entitled to paid leave, for example sick leave and annual leave, with casual employees receiving leave loading in place of these entitlements. An independent contractor is not eligible for these entitlements.
An employee is managed by the business while an independent contractor manages themselves in line with the expectations of the brief they have been given.
An employee receives regular remuneration for their work – usually weekly, fortnightly or monthly from the employer. An independent contractor invoices the employer on completion of agreed tasks.
While this overview outlines the main differences between contractors and employees, a number of other factors also need to be considered. As a company – whether you engage workers on a permanent, casual or independent contractor basis – it is crucial all contracts are legally sound.
I have seen many business owners exposed to unnecessary risk by failing to get the right advice on contractors and employees, and I’m passionate about helping businesses thrive by laying the correct foundations for a fair and safe workplace.