Sham Contracting – What is it?

Sham Contracting – What is it?

Principals and workers should try and understand the distinction between an independent contractor and an employee. These classifications can affect their rights and obligations, particularly in relation to tax, superannuation, and workplace entitlements and liabilities. Employers, and also their workplace advisers, need to be wary of entering into any labour arrangement to ensure they comply with the Independent Contractors Act 2006 (Cth) and do not breach the “sham contracting” provisions under the Fair Work Act 2009 (Cth).

Independent contracting is a common form of engaging services within the construction industry.

The operative provisions of the Independent Contractors Act 2006 (Cth) (IC Act) commenced on 1 March 2007. Prior to the IC Act, some independent contractors may have been ‘deemed’ to be employees under some state and territory laws. The IC Act sought to exclude the operation of these state and territory laws. One of the key consequences of the IC Act is that it is the law of commercial contracts, and not employment law, which regulates genuine independent contracting arrangements.

The IC Act provided for transitional arrangements in relation to independent contracting arrangements entered into before 1 March 2007 which did not “opt-in” to the IC Act. Those transitional arrangements have come to an end on 1 September 2011. Accordingly, certain State and Territory laws that may have deemed certain contractors to be employees will no longer apply (other than laws dealing with outworkers and owner-drivers).

Arrangements should be reviewed because those parties with ongoing independent contracting arrangements entered into before 1 March 2007 who have not ‘opted-in’ to the IC Act should be aware that, in circumstances where the contractors continued to have rights to be deemed employees under State and Territory laws, the end of the transitional period may trigger a right to accrued entitlements, such as leave.

The Australian Building and Construction Commissioner (ABCC) announced the Sham Contracting Inquiry (ABCC Inquiry). A sham contracting arrangement is where an employer attempts to disguise an employment relationship as an independent contracting arrangement. Certain activities with respect to sham contracting are prohibited under the Fair Work Act 2009 (Cth) (FW Act), including knowingly making false statements to persuade an employer to become an independent contractor and misrepresenting an employment relationship as an independent contracting arrangement (see Division 6, Part 3-1 of the FW Act).

The ABCC Inquiry sought to address a number of concerns with respect to sham contracting. These include the misuse of the label ‘independent contractors’ to enable underpayment or non-payment of workers’ compensation, removing grounds for unfair dismissal claims and avoidance of other rights and entitlements provided by industrial awards, particularly with respect to accrual and payment of leave entitlements. After receiving written submissions from a number of stakeholders and conducting a series of roundtables across the nation the ABCC is currently finalising its report into sham contracting.

2011 has seen a number of successful prosecutions for sham contracting offences by both the Fair Work Ombudsman and the ABCC, two of which are highlighted below.

In Fair Work Ombudsman v Centennial Financial Services Pty Ltd [2011] FMCA 459 Federal Magistrate Cameron found that a director and the human resources manager of Centennial Financial Services had breached various provisions of the Workplace Relations Act 1996 (WR Act) with respect to the accrual of unpaid annual leave entitlements and unlawfully converting employees to independent contractors. The former owner and sole director of Centennial Financial Services was fined $13,200 and the former human resources manager was fined $3,750. The Court found that, despite the human resources manager exercising no independent judgment and being overborne by the director, he should have been aware of, and at least attempted to give advice on, the company’s legal obligations.

In ABCC v Rapid Formwork Constructions Pty Ltd and Anderson, Federal Magistrate Neville imposed penalties of $24,000 on Rapid Formwork Constructions Pty Ltd (Rapid) for contraventions of the FW Act and WR Act as a result of misrepresentations of the terms and conditions of employment of two hired workers. Mr Kevin Anderson (Anderson) was also fined $1,500 for breaches of the WR Act as a result of these findings. In addition to these fines, Rapid and Anderson also agreed to back-pay the two workers nearly $7000 in unpaid wages and entitlements.

Sales persons found to be employees and not independent contractors

Ace Insurance hit with fines for sham contracting