Tips on avoiding sham contracting arrangements

Businesses are increasingly getting caught out on sham contracting arrangements as the Fair Work Ombudsman cracks down to avoid the government footing a $2.4bn a year bill in unpaid taxes. Legal services firm EI Legal offers these tips on how to avoid sham contracting arrangements.

Sham contracting is where an employment relationship between a worker and employer is misrepresented as an an independent contracting arrangement. Some employers do this to avoid paying entitlements such as leave, superannuation and minimum rates of pay.

Under the sham contracting provisions of the Fair Work Act 2009, an employer cannot:

• Misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement.
• Dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor.
• Make a knowingly false statement to persuade or influence an employee to become an independent contractor.

The Fair Work Act 2009 provides serious penalties for contraventions of these provisions. The Fair Work Ombudsman has been targeting particular industries and investigating sham contracting as a part of the new education and compliance campaign for employers. Industries involved in the audit include hair and beauty, cleaning, construction and call centres. "The concern is that some businesses may be engaging in sham contracting to falsely lower labour costs and to avoid paying annual leave, holiday pay, superannuation and pay as you go (PAYG) withholdings. This means that they are incorrectly classifying their employees as contractors," said Patricia Ryan, Practice Manager at EI Legal.

"Sham contracting is a serious offence and can expose a business owner and a company to up $33,000 in fines. Employers must seek professional advice if unsure of any employment arrangement."

EI Legal offers the following four tips to avoid sham contracting arrangements:

• Review all employment arrangements. Employers and human resource managers should check any employment arrangements with all independent contractors to make sure it is a genuine arrangement. It is important to note that just because workers have ABNs or provide an invoice for a payment does not of itself make them independent contractors.
• Get educated on the law. Employers need to be aware of the Independent Contractors Act, the Fair Work Act and the common law. The correct characterisation of labour is also relevant for workers compensation, superannuation, income tax and payroll tax.
• Review case studies to realise the extent of the issue. It is important that employers make themselves aware of scenarios where businesses have been caught out to understand the extremities the issue can cause. The Fair Work Ombudsman has created a tool to assist you in understanding whether an independent contractor is genuine. The case studies show different employment arrangements to show the differences between independent contractors and employees.
• Seek professional advice. If you are unsure of any employment arrangement in your business, seek professional help immediately.

"Employers must always structure their contracts with independent contractors so that the mistake of employment dressed up as contracting is not made. This issue will not be taken lightly by the Fair Work Ombudsman and heavy penalties will apply for offenders. EI Legal urges employers to check employment arrangements and seek professional advice if in doubt," said Ryan.

Many cases, believes EI Legal, are due to lack of knowledge of what classifies independent contracting arrangements. Below are the key differences between an employee and an independent contractor:

An employee:

• is usually supervised by an employer
• is usually required to carry out their work in a particular way, and comply with directions to perform work differently from time to time
• may be required to work only for one employer
• is entitled to paid holidays and sick leave
• is often required to represent to the public that they work for the employer (for example, by business cards, uniforms etc)
• generally cannot subcontract tasks given to him or her. A typical employee earns a fixed wage or salary and works in the business operated by the employer on a permanent, fixed term or casual basis
• an employee’s employer usually controls how their work is performed.

An independent contractor:

• has established his or her own business
• is usually paid to achieve an agreed result
• usually provides skilled services and generally controls how those services are provided
• is free to subcontract the work to others
• is free to refuse work
• generally supplies the material or special tools to complete the job
• usually bears the risk and cost of fixing their faulty work
• can advertise to the general public
• usually has no right to employee entitlements such as paid leave
• is in a position to make a profit from their work.