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The risks of sham contracting.

By: Rachel Brus, Business Development Manager.

The risks of sham contracting.

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

What is considered sham contracting?

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?

Why do employers misclassify workers as independent contractors?

There are some common examples of this happening including:

  • innocent mistake on the part of the employer thinking that because the worker is invoicing the company through an ABN, the arrangement is legal.
  • a misguided attempt to save the business money by engaging the worker as an independent contractor to disguise the employment entitlements they would have received as a staff member such as personal leave, annual leave and superannuation.
  • sometimes the worker requests the arrangement to further control the terms of their employment.
  • due to unfair dismissal cases being on the rise, having increased threefold over the past year, business owners sometimes mistakenly believe that hiring contractors will protect them from the risk of an investigation from the Fair Work Ombudsman.

Fines for sham contracting.

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.

Differences between contractors and employees.

Degree of control.

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.

Hours of work.

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.

Expectation of work.

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.

Tools and equipment.

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.

Tax.

An employee will be taxed by the employer. Independent contractors instead arrange their own tax and GST.

Insurance.

An employee is covered under the employer’s insurance however an independent contractor is responsible for their own insurance.

Entitlements.

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.

Management.

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.

Remuneration.

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.

Tips for engaging workers.

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.

Rachel Brus, Business Development Manager.

Rachel Brus is a Business Development Manager and has been proudly working with Australian small to medium businesses for nearly 20 years. Joining Employsure in 2016, Rachel has had the opportunity to help many employers reach their business goals, and is passionate about working with businesses to create a fantastic work environment where both employees and employers can thrive.

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