Are you sham contracting?
As an employer, using contractors, as opposed to permanent employees, comes with a range of potential legal risks

The Productivity Commission assessed that around 8.5% of Australia’s 11.8 million workers were independent contractors. Individual contractors are particularly prevalent in the IT, media and entertainment industries. However, as an employer, using contractors, as opposed to permanent employees, does come with a range of potential legal risks.

The safety net of minimum employment conditions provided by the Fair Work Act 2009 does not apply to contractors. As such, the Fair Work Ombudsman is increasingly focusing its investigations and prosecutions on cases of ‘sham contracting’ where there are attempts to mask an employment relationship with an independent contracting disguise.

What behaviour can get an employer in trouble?

The Fair Work Act contains three exclusions affecting supposed contracting arrangements. These provisions impose legal consequences for employers that engage in the following conduct:

  • Misrepresent to an employee an employment relationship that is in fact an independent contractor relationship.
  • Dismiss or threaten to dismiss an employee in order to re-hire them as an independent contractor in the same, or substantially the same, job.
  • Make a false statement to a current or former employee in order to persuade or influence that person to perform the same (or substantially the same) work as an independent contractor.

Doing any of the above will expose the organisation to liability, with a penalty of up to $54,000 and $10,800 for individuals, as well as potential claims being made for compensation if the employee has suffered loss as a result.

In a case that went before the High Court in 2015, it was unanimously ruled that an employer had contravened the Fair Work Act’s sham contracting provisions when they moved two permanent housekeepers onto independent contractor arrangements. This case stands as a warning to all employers.

Under section 550 of the Fair Work Act, if an organisation infringes the Act by, for example, engaging in sham contracting, a person within that organisation (i.e. a human resources manager who is involved in that breach) can become personally liable as an ‘accessory’. This would occur if the person is aware of the events that led to the infringement, and his or her deliberate actions form part of those events.

The Fair Work Ombudsman is increasingly exploring this kind of accessorial liability in its investigation of the use of contractors. The FWO has made it clear that it will scrutinise arrangements where a large company sources labour through smaller companies, knowing the sums paid to those companies are not sufficient to meet the employee entitlements of the workforce of the smaller companies. This could potentially lead to the larger company being prosecuted for being accessorily liable for the underpayments, where there are multiple levels of contracting between the business receiving the benefit of the labour and the people working in the business.

The Fair Work Ombudsman is also committed to using the Fair Work Act accessorial liability provisions to ensure parties do not turn a ‘blind eye’ to minimum employee entitlements, and hold to account those who are involved in breaches of the Act. If an arrangement appears to be attempting to conceal a true employment relationship, with a view to undercutting the industrial safety net, it is only a matter of time before it attracts legal exposure – not just for the companies involved but also for those individuals behind the corporate veil.

Key steps to avoid legal risk

You are on the hook ­– human resources managers, directors, CFOs and company secretaries need to understand the potential of being personally liable if a contractor arrangement is a sham and contravenes the Fair Work Act, along with applicable awards and enterprise agreements.

Confront the issue – if you don’t know whether a work arrangement is covered by a modern award and the National Employment Standards in the Fair Work Act, then you should take active steps to resolve the issue.

  • Generally, any contract with an individual who is to provide services on an ongoing basis has the potential to be an employment relationship. This risk exists regardless of what is stated in the contract, how the contractor’s remuneration is treated for tax purposes and what the parties consider to be the true legal status of the relationship.
  • Factors such as ‘results-based’ remuneration, an actual right of the contractor to delegate the work to others and features demonstrating the contractor is providing their services as part of his or her own business may make the contractor’s engagement genuine – but you need to drill down on this and reach an informed view.
  • Once you work out a work arrangement that is employment covered by a modern award and the National Employment Standards, you need to be satisfied that you are complying with the requirements of those instruments.

Information provided in this article is general only and it does not constitute legal advice and should not be relied upon as such. SEEK provides no warranty as to its accuracy, reliability or completeness. Before taking any course of action related to this article you should make your own inquiries and seek independent advice (including the appropriate legal advice) on whether it is suitable for your circumstances.