Sham Contracting - Risks and Implications

The Australian Building and Construction Commission (ABCC) just completed an open inquiry into independent employed workers and sham contracts.

Sham contracts involve any attempt to wrongly turn an employee into an independent contractor; (for a detailed of employees and independent contractors please see www.fairwork.gov.au).

This inquiry was the first stage in an ongoing investigation by the ABCC into this practice. The issue should be taken seriously by all concerned as the maximum penalties are $6,600 for an individual and $33,000 for a company.

The Fair Work Ombudsman has outlined several key indicators that employers need to consider before deciding if a worker is an employee or a contractor:.

A worker is most likely and Employee if they:

• Perform work, under the direction and control of their employer, on an ongoing basis
• Generally work standard or set hours
• Bear no financial risk (this is the responsibility of their employer)
• Are entitled to have superannuation contributions paid into a nominated superannuation fund by their employer
• Have income tax deducted by their employer
• Are paid regularly (e.g. weekly / fortnightly / monthly)
• Are generally entitled to get paid leave (e.g. annual leave, personal / carer's leave, long-service leave) if they are a permanent employee.

They are most likely an Independent contractor if they:

• Decide how to carry out the work and what expertise is needed to do so
• Bear the risk for making a profit or loss on each job
• Generally pay their own superannuation and tax, including GST
• Generally have their own insurance
• Are contracted to work for a set period of time (for example, 2 months), or to do a set task
• Decide what hours to work to complete the job
• Generally submit an invoice for work completed or are paid at the end of the contract or project
• Do not get paid leave.

Note: No single point above makes a person either an employee or independent contractor.

For employers that may still be wary about deciding if a worker is an employee or a contractor the Australian Government has a tool that may help. This can be found at (http://www.business.gov.au/IndependentContractors/DecisionTool.aspx)

More information about the inquiry can be found on the ABCC website (www.abcc.gov.au/shamcontracting  ).

We recommend all our clients and contractors to be aware of the implications sham contracting can have. The line between a subcontractor and an employee can often be marginal and current arrangements should be checked to avoid the risk of any unwitting sham contracting.