LawTalk Blog

Sham Contracting

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Do you believe you have been misrepresented by an employer and induced into a contracting arrangement instead of an employment relationship?

Have you performed work believing you are an independent contractor only to find out you are actually an employee?

What is the difference between a contractor and an employee?

An individual who is an independent contractor will generally invoice the company for work completed and are responsible for the payment of superannuation and income tax. Independent contractors have a high degree of control over their hours and the work they take on and they generally advertise for their services and delegate their work. Often they will be responsible for the provision of expensive and significant tools and materials. Independent Contractors are not paid for holidays and sick leave.

An employee is an individual who has an employment agreement with an employer. The employer will pay income tax, superannuation and workcover levies for the employee. The employer also exercises a high degree of control over the hours, shifts and jobs the employee performs. The employment relationship is a personal one - meaning that the employee is not able to sub-contract out their shift or attendance at work for that day.

There are significant differences between being an employee and an independent contractor and it's important that you are aware of the difference.

However there is also significant overlap between some of the factors relating to an independent contractor and an employee. For example, casual employees may still have employment elsewhere and are not paid for their holidays and sick leave- this does not mean they are an independent contractor. This is why the totality of the relationship needs to be considered when determining if a person is an independent contractor or an employee.

After the introduction of the Sham Contracting Provision in theFair Work Act("the FW Act") on 1 January 2010, the discussion on independent contracting versus  employment has only increased as a highly topical issue, particularly in the building and construction industry.

The FW Act takes the common law (based on case law precedent) view which is that the reality and the totality of the relationship between the employer and the person doing the work are the determining factors for deciding whether an employment relationship exists or that of an independent contracting relationship. The written terms of the contract or agreement are a consideration, to see if they reflect the reality, but are not conclusive. The Court will consider therealityof the relationship of primary importance.

Determining an employment relationship compared to a contracting relationship involves a consideration of many different factors. Current case law deems the "multi-factor" test is the correct test to apply. This test involves considering various indicators such as the control the person has in the workplace and for example:

  • Start/finish times and lunch breaks;
  • Advertising services;
  • Ability to delegate and sub-contract;
  • The provision of significant tools and materials;
  • Invoicing, remuneration and income tax/superannuation deductions; and
  • Holiday and sick payments.

This area of law is largely uncertain given that the different factors or indicators hold varying degrees of weight. For example, the fact that a person advertises their services and delegates work to others will lean very strongly towards the person being an independent contractor. The provision, by the person doing the work, of an expensive semi-trailer truck with significant maintenance costs will almost certainly result in the finding of an independent contracting relationship.  

The Sham contracting provisions are civil remedy provisions, meaning the employer can potentially be prosecuted for breaching the FW Act.

The law prohibits employers from:

  • Representing to an employee that that they are engaged under a contracting arrangement when in fact they are an employee (unless they did not know and were not reckless to this knowledge);
  • Dismissing an employee in order to engage the person as an independent contractor to perform the same or similar work; and
  • Knowingly making a false statement to persuade someone into a contracting arrangement.

A person who is affected, or an industrial association (such as a Union) or a workplace inspector can initiate action in the Federal Court for the employer to be fined. The penalties for breaching such provisions are significant.

The Court is also given powers to order compensation, grant injunctions or order reinstatement, if this is relevant.

If you think your employment status may be incorrect, you should seek experienced legal advice to determine if you are a contractor or an employee.

Please note, this Blog is posted in Adelaide, South Australia by Andersons Solicitors. It relates to Australian Federal legislation. Andersons Solicitors is a medium sized law firm servicing metropolitan Adelaide and regional South Australia across all areas of law for individuals and businesses.

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