3 minute read
LEGAL | The Dangers of Sham Contracting
HARRY McDONALD Solicitor & Associate Director, Greenhalgh Pickard Solicitors & Accountants
Businesses have been subject to hefty penalties even when they make mistakes on classifying workers as independent contractors through clumsiness and inadvertence. This is a clear message that enforcement bodies, like the Fair Work Ombudsman, have a zero tolerance for sham contracting.
WHAT IS SHAM CONTRACTING?
Sham contracting is an employer misrepresenting to an individual who they employ, or propose to employ, that they are engaged as an independent contractor rather than as an employee.
EMPLOYEE OR GENUINE INDEPENDENT CONTRACTOR – HOW DO YOU TELL?
To determine whether a worker is an employee or genuine independent contractor, the law doesn’t give much weight to the express intention of the parties. Even if the employer had the worker sign an independent contractor agreement, they will consider the nature of the relationship between the parties in totality. Elements of the engagement can either give weight to an argument the worker is an employee or an independent contractor, or can be a neutral consideration. The courts would then consider the whole character of the employment relationship and use this to develop an overall impression. Some of the elements the courts would consider are:
1. CONTROL
The greater the lawful right to command exercised by the employer over the worker, more weight is given to a finding the worker is an employee. This can be control over how, when and where the worker works, what they wear to work and the tools or equipment they have to supply to do their work, among other things.
2. INTEGRATION
This test looks at whether the work performed is done as an integral part of another’s business. If a worker is engaging in work as a ‘person in business on his own account’, he will likely be an independent contractor. However, if a person is doing low-skilled work for the benefit of another, and they’re not operating a business on their own account, they are more likely to be employees.
3. DELEGATION
The power for a worker to delegate or sub-contract work under the engagement is an important indication of an independent contracting relationship. If the written contract doesn’t provide an express right of delegation, the courts can examine whether any delegation did occur in practice.
4. SPECIALISATION
The more highly specialised and technical the work being performed, the greater the chance the worker could be a genuine independent contractor.
5. REMUNERATION
A person who receives a periodic wage which isn’t dependent on their level of skill, the difficulty or time required to complete a tasks, or measured against their output, looks much more like an employee than an independent contractor.
The Australian Industrial Relations Commission has noted that, in the modern economy, distinctions between methods of pay are less relevant, so this is not likely to be a deciding factor.
HOW DO I AVOID SHAM CONTRACTING?
Employers should always be mindful of the actual character of their employment relationships when engaging workers as independent contractors.
Greenhalgh Pickard have developed a simple questionnaire you can complete to assess the status of your workers.
If you’re uncertain about any of your employees or independent contractors, you should seek legal advice straight away. Call our office on 07 5444 1022 to arrange a meeting today.
DISCLAIMER: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication, we recommend that you seek professional advice.
