2 min read

Sham contracting: When a contractor is actually an employee

Earlier this year, a Pizza Hut franchisee was fined $216,700 by the Fair Work Ombudsman (FWO) for using a sham contract to underpay a delivery driver.

Instead of paying the driver as an employee, the employer asked him to provide an ABN so the delivery driver could be paid as an independent contractor, at a flat rate of $16 per hour.

However, as an employee, he would have been entitled to a minimum rate of $20.36 per hour and up to $40.72 per hour for overtime and public holiday work.

The driver also wasn’t properly paid other entitlements, including a per-delivery rate for use of his own vehicle, superannuation, or a uniform allowance.

The FWO ruled that the worker was an employee, not an independent contractor, as the employer had a level of direction, supervision and control over the driver who was not running an independent business.

In addition to the fine, the employer was ordered to back-pay the employee in full.

Could your business be accidentally caught up in sham contracting?

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

“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.

He 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”.

Did you know that a contract for an individual to provide personal services on an ongoing basis has the potential to be an employment relationship?

How do you identify the difference between a contractor and an employer?

The differences can be subtle and Charles says employers should “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 name?
  • Advertise their services elsewhere, or have other clients?
  • Negotiate their fees and use their own terms and conditions of trade?
  • Decide how, where and when the work is performed?
  • Provide their own tools and equipment?
  • Have their own insurance policies?
  • Add GST costs to their payments?

Learn more about your legal obligations relating to contractors and employment contracts in I2 Independent Contractors and E1 Employment Contracts in the Employment Law Practical Handbook.

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