Sham contracting is when an employer misrepresents employment as an independent contracting arrangement. An employer will have contravened the Fair Work Act if they represent or say that someone is an independent contractor when in reality they are actually an employee.
All “employees” are entitled to minimum entitlements, such as annual leave, sick leave, long service leave and payment of superannuation. These entitlements are enshrined in the National Employment Standards, Long Service Leave Act and relevant superannuation legislation. Numerous relevant Awards also give certain entitlements to workers in different industries.
Someone who is not an “employee”, but rather an “independent contractor”, is not entitled to payment of these entitlements. One example is that of a tradesman such as a plumber. You don’t pay annual leave or superannuation to a sole-trader plumber because they are a contractor. If a plumber has a sick day, they don’t get paid, whereas an employee does.
Characteristics of an employee:
- Works for only one business
- Set hours
- Little or no control over what work they do
Characteristics of a contractor:
- Works for multiple businesses/individuals
- No set hours
- Full control over what work they do
- No leave entitlements
If you are working for a business as an “independent contractor” and are not receiving payments for leave or super etc., but you meet the criteria of an employee (above), then there is a good chance that there is a sham contracting situation in play.
Sham contracting – specific prohibitions
Misrepresenting employment as independent contracting arrangement
A person (the employer ) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.
Dismissing to engage as independent contractor
An employer must not dismiss, or threaten to dismiss, an individual who:
(a) is an employee of the employer; and
(b) performs particular work for the employer;
in order to engage the individual as an independent contractor to perform the same, or substantially the same, work under a contract for services.
Misrepresentation to engage as independent contractor
A person (the employer ) that employs, or has at any time employed, an individual to perform particular work must not make a statement that the employer knows is false in order to persuade or influence the individual to enter into a contract for services under which the individual will perform, as an independent contractor, the same, or substantially the same, work for the employer.
Recent case law on sham contracting
The High Court of Australia recently found that accommodation provider Quest South Perth Holdings engaged in sham contracting by putting all of its cleaners on to independent contractor agreements (see Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd  HCA 45).
The sham contracting arrangement involved triangular contracting arrangement with another “contracting company”. The problem was that although the cleaners were classified by the employer as independent contractors, they were doing the same work they had done for years.
The High Court found that there was an implied contract of employment between Quest and each of the cleaners and determined that Quest had breached Section 357 of the Fair Work Act which outlaws sham contracting arrangements.
Remedies for employees who are victims of sham contracting
An employee who has been the victim of sham contracting is entitled to back payment of all unpaid leave, including sick leave taken and superannuation.
Sham contracting – penalties under Fair Work Act 2009 (Cth)
In addition to having to back pay all entitlements to an employee, an employer may be liable under the civil penalty provisions under section 539 of the Fair Work Act as follows:
Section 357 – Misrepresenting employment as independent contracting arrangement – 60 penalty units
Section 358 – Dismissing to engage as independent contractor – 60 penalty units
Section 359 – Misrepresentation to engage as independent contractor – 60 penalty units
Section 536(3)(c) of the Fair Work Act allows a Court to make an order that the penalty payable by the employer can instead be paid to “a particular person”, which could include the employee.
If you are concerned that you might be the victim of sham contracting then please contact our Contract Lawyers to discuss your matter with one of our employment lawyers on 9232 8033.