Sham Contracts
Do I have sham contractors?
A 'sham contract' is when you engage a worker as a contractor when the real arrangement is one of employment. This includes if you terminate an employee to re-engage them as a contractor. An employer may try to do this to reduce tax, avoid workers compensation or avoid paying employees their full entitlements.
How do I know if my 'contractors' are really contractors?
It is not sufficient to simply call a worker a 'contractor', or have a signed contract stating that they are a 'contractor'. A Court looks at what the true relationship is by looking at factors such as:
- If the worker is integral part of the organisation
- Who carries the risk for the work
- If the engagement is exclusive
- What does the arrangement appear to the ‘world at large’
- Who provides the tools
- Who determines conditions such as the hours
- If the worker is paid on a hourly basis or a 'per job' basis?
- Control
These factors are not a complete list and every situation is must be analysed on an individual basis.
For a complete analysis of whether your workers are sham contractors you should obtain legal assistance.
What could go wrong if I have engaged a worker with a sham contract?
If you have entered a sham contract you may be liable for back payments of superannuation, payroll tax and workers compensation, as well as back payments of award entitlements such as annual leave, sick leave and allowances and be exposed to unfair dismissal and adverse action claims.
Fines and penalties can be imposed by the Australian Building and Construction Commission or the Fair Work Ombudsman. Individuals, including directors and HR managers, are at risk of fines and penalties as well as the employer entity.
The Court’s have penalised HR Managers for implementing sham contracts even when there was evidence that the HR Manager was simply following the instructions of the employer.
How can employers protect themselves?
Setting up the arrangement correctly with a proper analysis and documentation of the engagement is critical.
For a complete analysis of your work arrangements and establish risk to you if any please feel free to contact us.
Case study:
Big Build Pty Ltd engaged all their workers as contractors. One of the workers, Charlie, was told there was no more work for him.
Charlie was not a true contractor. At all times the arrangement was the same as if he was an employee.
Charlie was therefore able to commence proceedings against Big Build Pty Ltd for entering into a sham contract and sought backpayment of all his entitlements as an employee form the date he commenced with Big Build aswell as compensation for being terminated.
Big Build Pty Ltd were found to have entered into a sham contract with Charlie. They were required to pay all to Charlie all the entitlements as an employee that Charlie would have accrued if he had been properly classified. They were also required to pay compensation for the dismissal. The Fair Work Ombudsman could also have issued a fine of $33,000.
For further information, contact the Workplace Law Team
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