Sham Contracting

Do you know the distinction between employees and independent contractors? Does your business employ both types? Perhaps you’ve unintentionally put yourself at risk of significant penalties and underpayment.

The truth is, navigating the world of independent contractors can be complicated, and the line between employees and contractors can be ambiguous. This can happen especially when there is conflicting advice from the Australian Tax Office and Fair Work Australia.   

Classifying employees vs contractors

Employee or contractor? Who is who? 

Assessing the relationship between an employer and an employee or an independent contractor involves several factors. However, there has been a shift from the traditional approach, which considered all formal and practical aspects of the working relationship, with a focus on who had control over the work performed. While these factors are still relevant, the emphasis is now on the drafting and content of written contracts and agreements. 

Businesses must pay attention to specific clauses in written agreements that indicate whether: 

• The individual’s hours of work are set or negotiable 
• The individual is engaged to complete specific work 
• There is an ongoing expectation of work 
• The employer pays superannuation 
• The employer deducts tax from the individual 
• The individual has access to leave entitlements 
• The employer pays the individual regularly 
• There are termination clauses 

Additionally, the contractual agreement should clearly state whether the relationship is that of an employer-employee or principal-independent contractor. Since these relationships have different rights and obligations, determining which one applies to an individual has significant implications for their entitlements, such as minimum wages, leave, and access to unfair dismissal claims. Moreover, a business that engages in sham contracting can be fined $582,500 per contravention. 

Why Sham Contracting Matters

You might recall that Uber, Foodora and Deliveroo were all fined for using sham contracting for their food delivery services to avoid minimum entitlements. These companies have large legal councils, yet they still got it wrong, resulting in Fair Work probes and fines.

Thinking of engaging a contract in your business? We are here to give expert advice from experienced workplace consultants. Contact Now Actually here.