Employee or Contractor – The Risks of Sham Contracting

In our March edition, we published an article which discussed some of the implications that face employers who, either deliberately or mistakenly, treat their workers as independent contractors when they should in fact be treated as employees. This type of arrangement is referred to as “Sham Contracting”.

This description may seem harsh for some employers who genuinely believe that their relationship with their workers is one of principal and independent contractor.

In some cases, the determination of whether a worker is, or is not, an employee can involve a complex consideration of a number of different criteria. However, the general definition of an employee is one who works under the direction of an employer, according to standard hours, or hours set by the employer, and bears no financial risk for the work performed.

An independent contractor on the other hand runs their own business and, as such, decides how and when to carry out the work, and the expertise needed to do so. An independent contractor bears the risk for making a profit or loss on each job and the cost of rectifying any defects.

Some employers believe that if they take steps to ensure that their workers obtain an Australian Business Number (ABN) and issue tax invoices to the employer for each week which they work is proof that the worker is a contractor.

Other employers believe that if they allow their workers to work for another employer when they do not have sufficient work available to them that this is proof that the worker is a contractor. Some employees will also pay their workers a higher rate of return than what they might have otherwise paid their workers on the basis that the worker will not benefit from an employee’s normal working entitlements. These factors are not sufficient to prove the existence of a relationship of principal and contractor.

Unfortunately for these employers, their mistake offers no excuse to the law and they are faced with the prospect of having to pay for annual leave and long service leave entitlements as well as superannuation and workers’ compensation payments. In addition, the employer may be required to pay penalties for contravening the Fair Work Act as was mentioned in a previous article.

The costs of meeting these outstanding obligations can often be quite significant and place employers under unexpected financial strain. Investigations by the Fair Work Ombudsman have found that Sham Contracting arrangements are prevalent in a number of industries including, cleaning services, hair and beauty and call centre industries. Another industry in which these types of arrangements seem to be occurring is in the building and construction industry.

For employers or employees concerned about the impacts of sham contracting arrangements and particularly those employed in the industries referred to above, we recommend that you contact Steven Hayles for further advice.