What is Sham Contracting?
When engaging contractors to perform work for your business, you need to be very careful that you do not misrepresent that an employment arrangement is an independent contractor arrangement.
This is known as 'sham contracting', and such conduct is in contravention of the Fair Work Act 2009 (Cth).
Under the sham contracting provisions of the Fair Work Act, you cannot:
• dismiss, or threaten to dismiss, an employee in order to then engage them as a contractor to perform the same or substantially the same work;
• knowingly make a false statement to an employee to persuade or influence them to perform the same, or substantially the same, work for you as a contractor; or
• represent to someone that is in fact an employee that they are a contractor, unless you did not reasonably know that fact.
If you do any of the above, you could be liable for a penalty of up to $33,000 (if your business operates as a company) or $6,600 (if you operate your business as a sole trader or partnership), and you might also be ordered to pay compensation to the person for any loss they suffered as a result of the conduct.
Here is how you can avoid sham contracting:
1. Do not engage someone as a contractor if you have led them to believe that they will be employed as an employee.
2. Do not knowingly make a false statement to a current or former employee, with the intention of persuading them to become an independent contractor to perform the same or substantially the same work for you.
3. Do not dismiss (or threaten to dismiss) an employee who performs particular work for you, in order to re-engage them as an independent contractor to perform the same or substantially the same work for you.
4. Do not assume that because a worker has an ABN and provides invoices for his or her services that the worker is an independent contractor.
Of course, the best way to avoid breaching the Fair Work Act 'sham contracting' provisions is to ensure that every independent contractor you engage is a 'genuine' independent contractor, and not an employee disguised as a contractor.
For more information about determining whether a person is an employee or a contractor, see our article released on 21 August 2012.
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