Sham Contracting
In the case below, a company thought they had employed a labourer as an independent contractor and told him that he would need to provide invoices with his ABN.
However, a Federal Magistrate found (based on agreed statement of facts) that the labourer did not operate a company or advertise his services, did not have his own public liability insurance and did not have insurance for sickness or accidents. He also did not make any contributions towards his own superannuation.
Therefore, the engagement was not a contract for service but was a contract of casual employment.
Both the company and its director were ordered to pay penalties for disguising a casual employment relationship as an independent contracting arrangement (the company $9,999 and the director $1,980). Director, Fair Work Building Industry Inspectorate v Supernova Contractors Pty Ltd & Anor [2012] FMCA 935 (9 October 2012)
Sham contracting is a breach of the Fair Work Act.
Under the sham contracting provisions of the Fair Work Act, you cannot:
• dismiss, or threaten to dismiss, an employee in order to engage them as a contractor to perform the same or substantially the same work;
• knowingly make a false statement to an employee to persuade or influence them to perform the same, or substantially the same, work for you as a contractor; or
• represent to someone that is in fact an employee that they are a contractor, unless you did not (reasonably) know that fact.
If you do any of the above, you could be liable for a penalty of up to $33,000 (if a company) or $6,600 (if an individual) and you might also be ordered to compensate the employee for any loss they suffered as a result of the conduct.
Here’s how you can avoid sham contracting:
1. Do not employ someone as a contractor if you have led them to believe that they will be employed as an employee.
2. Do not knowingly make a false statement to a current or former employee with the intention of persuading them to become an independent contractor to perform the same work.
3. Do not dismiss (or threaten to dismiss) an employee who performs particular work for you in order to re-engage them as an independent contractor to perform the same work.
4. Do not assume that because a worker has an ABN and provides invoices for his or her services that the worker is an independent contractor.
Of course, the best way to avoid breaching the Fair Work Act sham contracting provisions is to ensure that every independent contractor you engage is definitely an independent contractor, not an employee.