Sham contracting: is your business doing it?

A Gold Coast tour bus business found engaging in sham contracting has been ordered to pay penalties of $164,475.

The Federal Circuit Court has ordered the business to pay penalties of $164,475 and its sole director to pay penalties of $3,825. Read the Fair Work Media Release on this matter here.

Although some unscrupulous employers institute sham contracting agreements to avoid paying employee entitlements, the practice is not always deliberate. The difference between an employee and independent contractor is based on many different factors: no single factor determines whether a person is an employee or contractor. Some employers may have employees working under contractor arrangements without realising this is unlawful.

Let’s take a look at some key facts to ensure your business is protected from the significant financial and reputational penalties that accompany sham contracting.

What is sham contracting?

A sham contract is when an employer deliberately disguises an employment relationship as an independent contracting arrangement, instead of engaging the worker as an employee. The employer may require the employee to have an ABN and submit invoices for work completed. This is typically done to avoid paying employee entitlements such as superannuation, workers’ compensation, leave, and certain taxes.

Is sham contracting unlawful?

Sham contracting arrangements are illegal.

Where does sham contracting fall within employment legislation?

The Independent Contractors Act 2006 and the Fair Work Act 2009 protect the rights and entitlements of independent contractors.

Like to make sure you’re on the straight and narrow?

A logical starting point involves:

• identifying whether the person in question is legally considered a contractor or employee. The Fair Work Ombudsman has a factsheet on the differences between employees and independent contractors available here.
• ensuring valid contracts of employment for all employees and written contracting agreements for independent contractors are in place. 
• complying with the requirements of any applicable Modern Award and NES for all work arrangements.

All too hard?

Bare Bones Consulting can help employers with the right information for any workplace situation, including engaging employees under the correct contractual documentation.  We can show you simple, cost effective ways to comply with the Fair Work Act so you can focus on what matters to you: making your business a success.