How to spot a sham contracting arrangement

Serious consequences arise where an employment relationship between a business and a worker is incorrectly and/or deliberately classified as an independent contractor relationship. Some businesses will intentionally do this to avoid paying employee entitlements, such as paid leave and superannuation. Mischaracterising employment relationships in this way has been made illegal under the Fair Work Act 2009 (Cth) and can incur hefty penalties. 

What is a sham contracting arrangement? 

Sham contracting occurs where an employer deliberately attempts to disguise an employment relationship as an independent contractor arrangement to avoid paying employee entitlements.

Different types of sham contracting arrangements

Different types of sham contracting arrangements include where an employer (including but not limited to): 

  • misrepresents an employment relationship or a proposed employment relationship as an independent contracting arrangement; 
  • threatens to dismiss an employee in order to engage the employee as an independent contractor; or 
  • knowingly makes a false statement to persuade an employee to become an independent contractor.

Common indicators of a sham contracting arrangement

Below are some common indicators that a sham contracting relationship may exist (including but not limited to): 

  • Where the employer asks a new employee to get an ABN and tells the employee that they will work as an independent contractor. 
  • Where a business has been deducting income tax from payments to the contractor. 
  • Where a worker has been engaged under an independent contracting agreement but has been provided with paid leave.

This is not intended to be a comprehensive and exhaustive list of indicators. See our blog postDifference between employees and contractors”  to see a list of indicators that an employment relationship exists. 

Are there any exceptions to sham contracting arrangements? 

Exceptions to sham contracting arrangements considered in circumstances where:

  1. when the representation was made, the employer did not know; and
  2. the employer was not reckless as to whether that contract was a contract of employment rather than a contract for services. 

Potential penalties 

A sham contracting arrangement constitutes a breach of s 357(1) of the Fair Work Act 2009 (Cth). Each breach attracts a penalty of up to $12,600 for individuals and up to $63,000 for corporations. Businesses may be liable for any unpaid leave entitlements pursued through the Fair Work Ombudsman. Business may also be pursued for any unpaid superannuation through the Australian Taxation Office. 

How to avoid entering into a sham contracting arrangement? 

Whether you are a worker or a business engaging a worker, you should ensure that a comprehensive and high quality written agreement is in place between yourself and the other party to ensure that the relationship is defined and understood by both parties. 

As mentioned above, however, this is not the only determinative factor and the general nature of the relationship should be examined. Please read our blog postDifference between employees and contractors”  to see a list of indicators that an employment relationship exists and some useful tools you can utilise to assist with this distinction.

If your business has current contracting agreements in place, you should review all these agreements to ensure that they do not contain provisions which may indicate that an employment relationship exists. 

Think you or your business has been subject to a sham contracting arrangement? 

Legal Kitz’ solicitors have extensive experience with sham contracting arrangement matters and can provide tailored advice to your situation. For legal advice tailored to your business, please contact Legal Kitz at info@legalkitz.com.au or 1300 988 954.

Want to purchase agreement templates that ensure your business is compliant with the Fair Work Act 2009 (Cth)? 

Our partner, Business Kitz Pty Ltd, has comprehensive Employment Agreements and Independent Contractor and Subcontractor Agreement Templates. These templates include all relevant provisions to ensure that your business is compliant with the Fair Work Act 2009 (Cth) and will help protect your business against liability for sham contracting arrangements. 

Legal advice

You should seek legal advice before entering into an agreement. If you are unsure as to whether your workers are employees or contractors or think that you may be in a breach of the sham contracting provisions set out in Fair Work Act 2009 (Cth), Legal Kitz are here to assist you.

Click here to book a FREE consultation with one of our highly experienced solicitors today or contact us at info@legalkitz.com.au or by calling 1300 988 954. 

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