August 28, 2012

Contractors, Employees & Sham Contracting

Hiring personnel with contractor agreements is a useful practice for businesses, however, when you are establishing a contracting arrangement, there are a number of legal issues that you should consider.  One of these is “sham contracting”, which is labelling workers contractors when they are actually employees.

WHAT IS A “SHAM CONTRACT?

The Fair Work Act 2009 prohibits sham contracting, and defines it as:

  • misrepresenting an employment relationship as an independent contractor arrangement;
  • misrepresenting a proposed employment relationship as an independent contractor arrangement; or
  • dismissing (or threatening to dismiss) an employee to re-engage that person as a contractor.

Mixing employee and contractor obligations in respect of the same worker often creates sham contracts unknowingly.  If a business’s relationship with an individual is at issue, the law steps in to deem the relationship as one of either contractor or employee.  The following characteristics are relevant:

  • A Contractor invoices work, pays his or her own GST and tax, often (but not always) pays his or her own superannuation, and is generally contracted for a specific scope of work.
  • An Employee works in an ongoing role, does not bear financial risk, and is entitled to have superannuation contributions paid by the employer.  Importantly, employees will also receive award entitlements.

 

FAIR WORK OMBUDSMAN v MACLEAN BAY PTY LTD AND ANOR

In the Maclean Bay case, a number of casual employees were dismissed after refusing to sign contractor agreements, which was a blatant contravention of the Fair Work Act 2009.  The corporation and the resort’s director were fined approximately $300,000, and ordered to pay the affected employees back-payments of almost $40,000.  The judge, Marshall J, showed a distinct lack of sympathy for creative defence arguments around the distinction between employees and contractors.

CONTRACTORS vs EMPLOYEES

Whilst the case of Maclean Bay was manifestly unlawful, it is far more common that businesses contracting with workers are simply unaware of their legal responsibilities.  If your business is considering hiring workers, or has existing employment and contractor agreements, it would be beneficial to reflect on the following questions:

  • Do the arrangements with each of my contractors and employees fall clearly into their respective categories?
  • If not, what remedial measures should I take to comply with legislation?
  • What safeguards should I build into contractor agreements before I enter them to ensure that they cannot be construed as employment contracts?