Employers beware! Sham contracting is risky

Introduction

Workers ordinarily fall within one of two categories, those who work subject to a Contract of Service (employees) and those who work subject to a Contract for Service (independent contractors).

It can be difficult to discern the difference between the two. Whether a worker is classified as an employee or an independent contractor generally boils down to the level of control, or direction, that the employer or principal exerts over the work activities.

Generally speaking, an employee is expected to work under the direction of an employer, with direct input as to how their job is performed, equipment to be used, work location and the clothing permitted to be worn. Employees are usually paid a wage or salary for their time worked and receive associated benefits such as leave entitlements and superannuation.

Independent contractors, on the other hand, often enjoy much more freedom as to how they perform their work. For example, a carpenter may simply be directed to install a door. The length of time taken to install the door, the tools used and the time of day at which the work is performed is often left to the carpenter's discretion.

Furthermore, independent contractors are often paid in accordance with tasks performed and are usually responsible for payment of their own taxes. Independent contractors may not be entitled to compulsory superannuation benefits and have no entitlement to annual leave or sick leave (who has ever heard of a carpenter being paid for a sick day!)

What is sham contracting?

Essentially, sham contracting is the engagement (or re-engagement) of an employee as an independent contractor, when they ought legally to be regarded as an employee.  Such an arrangement can be manifestly unfair to the worker, as they are subject to the control and direction of an employee without receiving the associated leave and superannuation benefits.

Section 357 of the Fair Work Act 2009 (Cth) imposes financial penalties on employers who participate (even unintentionally) in sham contracting arrangements, with fines potentially reaching tens of thousands of dollars.

What should I do?

As an employer, you must consider the entire working relationship to determine whether you are hiring an independent contractor or an employee. A variety of factors should be taken into account, such as:

• who determines the hours of work and how work is to be performed?
• does the worker wear your business logo?
• does the worker act as a representative of your business?

Unfortunately, there is no exhaustive "list of factors" that can be relied upon to determine whether a worker is an employee or an independent contractor.  The working relationship as a whole must be assessed.

If you plan on hiring workers, but are uncertain as to the manner in which they should be engaged, we would strongly recommend you seek legal advice. You don't want the Fair Work Commission to determine that a worker you have engaged for the past 5 years as an independent contractor is in fact an employee. You could not only be fined, but would most likely be required to pay 5 years of entitlements to the worker!

For further information regarding contractors, refer to our article: What you need to know: Superannuation for Contractors.

How can Sharrock Pitman Legal help?

The above is only a snapshot of sham contracting. As an employer, it is vitally important that you obtain professional advice when it comes to this important issue. If you are an employer and you need advice, call Sharrock Pitman Legal today on 1300 205 506 or complete the form below.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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