- ‘Sham contracting’ is a term used to describe an employment relationship where a worker is engaged by a company as an ‘independent contractor’ when, in fact, they should be engaged as an ‘employee’.
- An independent contractor working as an ‘employee’ of a business is not paid employee entitlements such as annual leave, and long—service leave.
- The nature of the relationship between the worker and a business is key in determining whether a sham contract exists.
- A sham contract can eventuate, even if the business did not intend for such arrangement to occur.
- Instituting sham contracts is illegal under the Fair Work Act 2009 (NSW) and significant penalties can be incurred by employers and corporations.
What is Sham Contracting?
A sham contract arrangement eventuates when a business knowingly, or recklessly, tells a worker that they are an independent contractor, when the arrangement is in fact, that of an employer and employee.
This arrangement may still eventuate, even if the worker is operating under an Australian Business Number or invoicing the business for their work.
How Do I Know If I Have a Sham Contract?
Sham Contracting Test
The question of whether a person is an employee or subcontractor is a difficult and complex legal question. The Courts refer to the two-step test enunciated in Hollis v Vabu Pty Ltd (2001) 207 CLR 21 to determine whether an employment or contractor relationship exists.
Step 1 – Is the person performing the work an entrepreneur who owns and operates a business?
Step 2 – In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?
Sham Contracting Case Law
The nature of the relationship will determine whether a sham contract exists, regardless of what the arrangement is called. As provided for in Marshll v Whitakers Building Supply Co  HCA 26, the distinction between employee and independent contractor is rooted fundamentally in the difference between a person who serves his employer as the employer’s business, and a person who carries on a trade or business of his own.
Such circumstances would include, but are not limited to:
- The intention between the parties;
- Whether the employee/contractor is able to delegate or subcontract work;
- Financial responsibility, insurance and risk;
- Whether the employer maintains a degree of control over the person;
- Whether the employee/contractor is able to work for other employers;
- Whether the employee/contractor supplies their own vehicle and bears their own expenses for maintaining the vehicle;
- Whether the employee/contractor has control over the manner in which they perform their work. For example, whether they are assigned to a ‘work roster’ and whether they are able to refuse work
- Whether the employee/contractor is required to wear a uniform;
Section 12(3) of the Superannuation Guarantee (Administration Act) 1992 also provides that “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract”.
What is the Difference Between an Employee and an Independent Contractor?
|Work set hours each week and will have a minimum wage or pay rate. Employees will receive wages on the basis of their time worked||Are engaged for an agreed specific task, and can usually negotiated their own fees and working arrangements|
|Perform work under the direction and control of the employer||Have a high level of control over how the work is done, and may hire other contractors to assist with the work|
|Have an ongoing expectation of work||Are engaged for a specific period of time|
|Are covered by their employer’s insurance||Hold their own insurance|
|Are provided with tools and equipment, or a tools allowance by their employer||Provide their own tools and equipment|
What are the Consequences of a Sham Contract?
- If you are an employee, but working as an independent contractor, you will not receive employee entitlements, such as annual and personal leave, superannuation, and allowances and penalty rates.
- Is sham contracting illegal? Regardless of whether the arrangement is intentional, instituting sham contracting agreements is illegal. Under the Fair Work Act 2009 (NSW), an employer must not:
- Claim an employee is an independent contractor when they are not
- Make false statements to convince an employee to become an independent contractor
- Dismiss, or threaten to dismiss, an employee for failing to agree to become an independent contractor
- Dismiss an employee and then re-hire them as an independent contractor to do the same work
- Sham contracting penalties – Significant penalties can be incurred by employers/corporations who contravene the provisions under the Fair Work Act 2009 with respect to sham contracts. The maximum penalty is $13,320 for individuals and $66,600 for corporations, per contravention.
- The courts may also make orders to have the employee compensated for any loss
What do I Do if I think I am a Party to a Sham Contract?
- Contact the team at Coutts for comprehensive legal advice!
How to Avoid Sham Contracting
Coutts are able to help employees who think they are involved in a sham contracting arrangement. Coutts are also able to help employers to ensure that correct agreements are in place for employees and contractors and are able to assist with resolving a variety of workplace problems. Please contact our Employment Law team to arrange an initial consultation.
This blog is merely general and non-specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever to this blog, including all or any reliance on this blog or use or application of this blog by you.