The Dangers of Sham Contracting
The Fair Work Ombudsman has delivered a timely reminder for businesses to avoid dodgy sham contracting practices and of the risk of personal liability for directors and HR managers.
The Federal Circuit Court has handed a Gold Coast tour bus operator a fine of $164,475 and a personal fine to its director of $3,825 for brazen sham contracting. Workers were sent text messages requiring they provide ABNs and advising they would no longer receive superannuation payments as they were being treated as independent contractors.
The workers were then paid a flat rate, failing to take into account weekends, public holidays or overtime allowances owed under the Passenger Vehicle Transportation Award 2010.
This arrangement resulted in underpayments for two drivers, noted as already being on relatively modest incomes, of $27,938.61 and $15,538.60. After the Fair Work Ombudsman began investigating, the tour bus operator admitted that they had applied a false label to hide the employment relationship.
Even though the employer provided significant cooperation with the Ombudsman’s investigation, the affected employees being back-paid in full and the Court noting that the contraventions came about “through clumsiness and inadvertence rather than anything else”, a clear message has been sent that there is a zero tolerance for sham contracting.
So let’s discuss exactly what sham contracting is, how you can spot it and how you can avoid it.
What is sham contracting?
Sham contracting is an employer misrepresenting to an individual who they employ, or propose to employ, that they are employed under a contract for services (as an independent contractor) rather than a contract of service (as an employee).
Employee or genuine independent contractor – how do you tell?
To determine whether a worker is an employee or genuine independent contractor, the Fair Work Ombudsman doesn’t give much weight to the express intention of the parties. Even if the employer has had the worker sign an independent contractor agreement, they will consider a set of indicia from a body of case law. These elements will either give weight to an argument the worker is an employee or an independent contractor, or will be a neutral consideration.
The courts would then consider the whole character of the employment relationship and use this to develop an overall impression.
The greater the control exercised by the employer over the worker, more weight is given to a finding the worker is an employee. This can be control over how, when and where the worker works, what they wear to work and the tools or equipment they have to supply to do their work, among other things.
This test looks at whether the work performed is done as an integral part of another’s business. If a worker is engaging in work as a ‘person in business on his own account’ he will likely be an independent contract. However, if a person is doing low-skilled work for the benefit of another, they’re not operating a business on their own account and are more likely to be employees.
The more highly specialised and technical the work being performed, the greater the chance the worker could be a genuine independent contractor.
A person who receives a periodic wage which isn’t dependent on their level of skill, the difficulty or time required to complete a tasks or measured against their output looks much more like an employee than an independent contractor.
The Australian Industrial Relations Commission has noted that, in the modern economy, distinctions between methods of pay are less relevant, so this is not likely to be a deciding factor.
As mentioned previously, an express intent of the employer and worker as to the character of the employment relationship is not going to be a determinative element. The courts have described this as a restriction against ‘creating something which has every feature of a rooster, but calling it a duck and insisting that everybody else recognise it as a duck.’
How do I avoid sham contracting?
Employers should always be mindful of the actual character of their employment relationships when engaging workers as independent contractors. As the Federal Circuit Court noted in the case of the Gold Coast tour bus operator, engaging an employee as an independent contractor and only paying them a flat rate will quickly run up substantial back-payments and even more significant penalties from the court.
If you’re uncertain about any of your employees or independent contractors, you should seek legal advice straight away. Call our office on 07 5444 1022 to arrange a meeting today.
Harry McDonald is a solicitor admitted to practice in the Supreme Court of Queensland, practising in the Commercial and Property Law team at Greenhalgh Pickard Solicitors. Within commercial law, Harry has a keen interest in employment law and enjoys assisting commercial clients in all areas of their employment & industrial relations with experience in employment contracts, sub-contractor agreements, restraint clauses, unfair dismissals, general protections, workplace policies and guidelines and general HR advice.