The prohibition on "sham arrangements"

Posted on 26-Aug-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.

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?
  • Does the worker receive statutory leave entitlements such as annual and long service leave?
  • Is the worker engaged continuously or for a specific project?
  • Is the worker paid by the hour or at the completion of a project?
  • 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 defense 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. Mr. Noy, on behalf of Nubrick Pty Ltd (Nubrick), a subsidiary of Brickworks Limited, offered work to Mr. Little and Mr. Bonnice. They were offered a flat rate of $30 per hour out of which they had to pay their owntax, had to provide an ABN and were required to send invoices for their work. The CFMEU brought the application in the Court alleging that the contracts entered into with Mr. Little and Mr. Bonnice were in reality, contracts of employment and that Nubrick had contravened the sham contracting provisions of the WR Act. Under the WR Act, it was prohibited for a person to offer to enter into a contract for services as an independent contractor where in reality, the contract one of employment as an employee was.

However, there is no contravention if the person proved on the balance of probabilities that at the time the person made the representations, the person did not know and was not reckless as to whether the contract was a contract of employment rather than a contract for services. In this case, the Court had two issues to decide:

  • whether the contracts were contracts of employment or for services
  • if they were contracts for services whether Mr. Noy, at the time he made the representations, was "reckless as to whether" the contracts "would be contracts of employment".

In deciding how to classify the contacts entered into, the Court examined the terms of the offers made to the two workers. The Court weighed the factors in favor of an independent contract:

  • Both workers were offered a flat rate of $30 per hour out of which they would have to pay tax
  • They were told they would have to provide an ABN and had to invoice the company for the work done
  • They were told they would not get superannuation
  • At least one of the workers was told they could delegate their work to someone else.

Factors that the Court considered were indicative of a contract of employment were:

  • The workers had fixed hours of employment and were told when to start and finish
  • They were engaged to perform continuous work for the company
  • They were provided with some safety gear
  • They did not provide their own tools and equipment but used equipment provided by the company
  • They had no special qualifications and did not provide any skilled labor.

In examining these factors, the Court found that while "both Mr. Little and Mr. Bonnice were offered and accepted contracts of employment, the Court does not find that the contracts were clearly contracts of employment or that they are indicative either way". Of more importance to the Court was the fact that at the time Mr. Noy made the representations, he did not know that either of these contracts were contracts of employment.

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