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Workplace relations, Independent Contracting: Risks Associated with Sham Arrangements

Announcement posted by Harwood Andrews Lawyers 22 Jun 2010

Workplace sham contracting arrangements can present significant risks for employers who are seeking to avoid the employment related statutory obligations, such as superannuation, payroll tax, workers compensation, leave entitlements and withholding tax. However employers who intentionally disguise employees as individual contractors face serious financial penalties of up to $6,600 for individuals and $33,000 for corporations if convicted.

Sham contracting occurs where an employer engages a worker under the same conditions as a normal employment relationship, but classifies the worker as an individual contractor. The arrangement may be as blatant as an employer dismissing its employees then re-engaging them once an ABN is provided. In more discreet cases, there may be difficulties in establishing whether a sham contracting arrangement exists.

Many workplaces engage workers who fit somewhere between the definition of employee and contractor. Where do they stand?

It is necessary to collectively review the factors which point to whether a sham arrangement is in existence:


- Who pays the tax and makes superannuation contributions?
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Does the worker receive statutory leave entitlements such as annual and long service leave?
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Is the worker engaged continuously or for a specific project?
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Is the worker paid by the hour or at the completion of a project?
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Can the worker delegate duties?
- Is the worker under direct supervision and control of the employer?

If an employer is prosecuted by the Fair Work Ombudsman under this provision and the worker is deemed to be an employee, the onus lies with the employer to prove that it believed there was no risk, harm or illegality in engaging the worker as an independent contractor.

A defence of ignorance will not stand where the employer has taken deliberate or reckless steps to engage the worker as a contractor in order to avoid meeting employee entitlements.

In addition to prosecution by the Fair Work Ombudsman, employers who fall foul of the sham contracting arrangements prohibition may face a claim for back-pay of unpaid leave entitlements, overtime and compulsory superannuation contributions owed to the worker, further increasing the financial consequences of engaging in this prohibited practice.

Employers should seek legal advice regarding their existing and future contracting arrangements to reduce the potential liability of being prosecuted.

Harwood Andrews Lawyers workplace relations team has extensive experience in advising and representing employers and employees in all aspects of industrial relations. Our team is lead by Jim Rutherford, an accredited specialist in workplace relations law together with,Rohan Kuxand Melissa Whelan.

If you would like further information about Harwood Andrews Lawyers or our workplace relations services please contact Jim Rutherford on1800 552 018or jrutherford@harwoodandrews.com.au.