3 min read

Are you accidentally caught up in sham contracting?

By Brihony Tulloch

Online food delivery company Foodora Australia has announced that it will fight claims that it dismissed riders for working for competitors and the company’s arrangements could be seen as sham contracting.

The risk of a company like Foodora Australia being slapped with a $32,000 penalty per contractor highlights the importance of establishing solid contracts with your employees and contractors, or at the very least, identifying when they’re legally considered a contractor or employee.

Charles Power, a partner at legal firm Holding Redlich, and Editor-in-Chief of the Employment Law Practical Handbook, explains what is sham contracting.

“Sham contracting occurs when a business arranges for a worker to form their own business to become a contractor so the business can avoid meeting its obligations if the worker was an employee,” Charles says.

In the case of Foodora, it’s alleged the company failed to pay minimum hourly rates, superannuation or paid leave.

Charles emphasises that “if you determine that a work arrangement is covered by a modern award and the NES, you must ensure you are complying with the requirements of those instruments”.

Failure to do so can spell bad news for your business.

How to protect yourself and your business

Having a signed and agreed-upon employment contract is the key to protecting yourself from unfair dismissal or misconduct claims from contractors.

“Generally, any contract for an individual to provide personal services on an ongoing basis has the potential to be an employment relationship,” says Charles.

In other words, you will need to have a contract in place whether your contractor works for you on a full-time basis or is just doing seasonal work.

When is a contractor a contractor?

The second step in protecting yourself and your business from sham contracting is knowing how to separate employees from contractors. After all, you can’t honour your legal obligations to contractors if you don’t know when you’ve technically engaged one!

“The differences between an employee and a contractor can be subtle,” says Charles. “Compare the indicators of an employment relationship against the indicators of a contractor relationship to help you determine whether the worker is conducting their own business.”

Does the contractor:

  • Have their own business names or contract through an incorporated entity?
  • Advertise their services to the world at large, e.g. in industry magazines or on the internet?
  • Negotiate their own fees?
  • Take out their own insurance and indemnity policies?
  • Provide their own tools and equipment?
  • Do not have PAYG tax deducted from their payments?
  • Are registered for the goods and services tax (GST)?
  • Pay all their own business expenses?
  • Are paid only for the work they complete?
  • Can delegate some of their tasks to others?
  • Decide how, where and when the work is performed?
  • Use an ABN (although in the past, courts have given this little weight)?
  • Provide services to a number of different purchasers (although the court has previously stated this was no different to that of a casual or part-time employee working for a small number of employers)?
  • Employ or subcontract individuals to perform the work?
  • Use their own standard rates, and terms and conditions of trade?
  • Have their own systems for invoicing and payment, debt-collection systems and budgeting?

If some of the above characteristics are present, but the legal status of the relationship is still unclear, consider the following questions:

  • Is the worker running their own business or enterprise independently? If so, the worker is a contractor.
  • Is the worker operating as a representative of the principal’s business with little or no independence in the conduct of their operation? If so, the worker is an employee.

Consequences of sham contracting

Charles warns that you can be held accessorily liable for your contractors’ contraventions, including if they engage in sham contracting. Furthermore, HR managers, directors and company officers can be held personally liable for sham contracting.

You will be accessorily liable if you:

  • know the essential facts constituting the contravention; and
  • are ‘knowingly concerned’ in the contravention, i.e. an intentional participant.

You may be prosecuted by the Fair Work Ombudsman (FWO) if you are suspected of using a sham contracting arrangement to avoid your obligations as an employer.

If you are found guilty, you will be liable for a penalty of up to:

  • $12,600 for an individual; or
  • $63,000 for a company.

You may also be required to compensate the worker for any employment entitlements they would otherwise have accrued, e.g. annual leave.

Once you have established what type of contract needs to be used between you and the contractor, you can take pro-active steps towards in protecting yourself and your business.

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