Sham Contracting Arrangements

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A sham contracting arrangement is where an employer misrepresents an employee’s relationship as an independent contracting arrangement to avoid being accountable for employee entitlements. A sham contracting arrangement, however, is illegal and prohibited under the Fair Work Act 2009 (Cth).

To avoid legal implications, it is essential that all employers are familiar with the circumstances in which an individual is an employee and not independent contractor.

Similarly, employees should also be aware of their rights under the Fair Work Act 2009 (Cth) to avoid being deprived of their employment benefits.

Fair Work Act 2009

Chapter 3, Division 6  of the Fair Work Act 2009 (Cth) provides that an employer cannot:

  • Misrepresent to an employee (or a person who the employer proposes to employ) that the individual’s employment is a ‘contract for services’ and will perform work as an independent contractor;
  • Dismiss or threaten to dismiss an individual who is an employee of the employer in order to engage that individual as an independent contractor to perform the same, or substantially the same, work under a contract for services;
  • Make a false statement (known to be false) in order to persuade or influence the individual to enter into a contract for services under which the individual will perform the same work (or substantially the same) under the guise of being an ‘independent contractor’.

Identifying the difference between a ‘contract of services’ versus a ‘contract for services’

If you believe you are being subjected to a sham contracting arrangement it is important to identify factors of your employment relationship which may indicate you are an employee and not an independent contractor.

The Fair Work Ombudsman provides a list of questions an individual can ask in order to determine whether or not they are an employee (contract of services) or an independent contractor (contract for services).

They are:

Who has the control in the relationship as to how the work is performed?

An employee generally performs work under the control of an employer who stipulates how and when the work is to be completed. An independent contractor, however, demonstrates a high level of control over how the work is performed.

Do the hours you are working meet a general set standard?

An employee works to a stipulated and set amount of hours which may vary from week to week if the employee is casually employed. An independent contractor in a contract for services, however, makes an agreement to complete specific tasks in a set amount of time.

How are you paid?

An employee is paid regularly. This could be weekly, fortnightly or monthly. An independent contractor obtains an ABN and submits invoices for work completed when the contract or project is finished.

Is there an expectation of ongoing work?

An employee should expect ongoing work, even if this ongoing work is set consistently within a designated or capped time period. An independent contractor, however, is usually only engaged for a specific task. Once this task is completed the work ceases.

Are you entitled to leave?

An employee is entitled to receive paid leave such as annual leave, sick leave and long service leave. A casual employee may receive a loading in place of leave entitlements. An independent contractor does not receive paid leave.

Is the financial risk on the employer?

The employer, not the employee, bears the financial risk and responsibility of making a profit in an employee-employment relationship. An independent contractor bears his or her own risk of making a profit or loss on a specific job.

Who provides your tools and equipment?

An employee is generally provided tools and equipment by an employer. A tool allowance may also be provided. An independent contractor usually relies on his or her own tools and equipment when completing a service.

Are you entitled to superannuation?

An employee is entitled to superannuation which is paid by the employer into a nominated fund. In comparison an independent contractor is responsible for managing his or her incoming funds and apportioning an amount into his or her own superannuation fund.

Who pays your tax?

An employee has his or her tax deducted by his or her employer. An independent contractor is responsible for paying his or her own tax and GST.

If you believe that the factual circumstances of your employment relationship are indicative of an employer-employee relationship and you are struggling to obtain your employee benefits, or you believe you are being subjected to a sham contracting arrangement, you should seek legal advice.

Employers who are uncertain about distinguishing an employee and contract of service from an independent contractor and contract for service should also contact an employment lawyer to ensure they are not breaching their obligations.