Sham Contracting – Are your contractors actually bone-fide employees?
Both Fair Work Australia and the Australian Taxation Office (ATO) have indicators to determine which workers are employees or contractors. Some of the indicators overlap and some are different.
It is important to make a correct determination as sham contracting (defined as when a worker is classified as a contractor but they should really be an employee) is illegal under Fair Work with each contravention potentially attracting high financial penalties for both individuals and corporations.
To identify whether a worker is a contractor or employee by Fair Work standards the following is considered:
- Amount of control over how work is performed – are work hours, location and method of work directed by the employer or does the worker have a degree of autonomy
- Financial responsibility and risk (does the worker come under the employer’s insurance or do they need to provide their own certificates of currency?
- Tools and equipment (does the employer provide these or is it expected that the worker provides their own)
- Ability to delegate or subcontract work – does the worker need to do the work themselves or can they find someone else to perform the services?
- Does the worker work standard hours (unless they’re a casual employee, in which case their hours may vary from week to week) or is there an agreement between both parties regarding the volume of hours required to compete a specific task?
- Is there an expectation of ongoing work or is the work project/task based?
Recently, Doll House Training Pty Ltd (Doll House), a Sydney health and wellness research company was penalised $197,000 in court-ordered penalties for contraventions including sham contracting involving workers with disability. While this example is focused on a different industry, it is still relevant for FTMA members.
In short, Doll House breached the Fair Work Act after three employees were forced to move from permanent employment to independent contractors, although they were clearly performing substantially the same work. The Independent Contractor Agreement that the workers were provided included a number of terms aligned to a contract of employment (for example, the worker was contracted to work for Doll House rather than any business of their own) but at the same time, Doll House stipulated that the workers had to provide Australian Business Numbers and submit invoices to be paid. The workers felt they had no other choice to accept the sham contract.
The Justice preceding over the case noted a clear imbalance of power between the employer and the disabled workers which led to the workers enduring financial and other stresses. Other issues included the failure of the business to pay the workers in full at least monthly during their employment and failure to comply with a Notice to Produce issued by a Fair Work Inspector that required it to provide specified records or documents, including documents relating to terms of engagement and duties performed by the workers.
The underpayments were rectified in full after the FWO commenced its investigation.
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