Dodgy dealings: Getting caught for sham contracting

by HCA30 Jan 2012

In an effort to reduce tax evasion, which currently costs $2.4bn annually, The Fair Work Ombudsman (FWO) has announced a crackdown on businesses engaging in sham contracting arrangements.

Sham contracting is where an employment relationship is misrepresented as an independent contracting arrangement, usually so employers may avoid paying necessary entitlements including minimum rates of pay, annual leave and superannuation.

Under the Fair Work Act 2009, the provision relating to sham contracting means an employer cannot:

  • misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement

  • dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor

  • make a knowingly false statement to persuade or influence an employee to become an independent contractor

“Sham contracting is a serious offence and can expose a business owner and a company to up to $33,000 in fines. Employers must seek professional advice if unsure of any employment arrangement,” Patricia Ryan, practice manager at EI Legal, said.

FWO regularly conducts industry audits, and a recent Federal Magistrates decision to fine a HR manager $3,750 for his role in breaching the Workplace Relations Act 1996, highlighted the importance of reviewing all contracting relationships.

Ryan added that sham contracting arrangements are completely avoidable, and EI Legal believes that many illegitimate contracts are due to lack of knowledge of what classifies independent contracting arrangements.

The following four tips were offered by Ryan to safeguard against entering into sham contracting arrangements:

1. Review all employment arrangements

Employers and HR managers should check employment arrangements with all independent contractors to make sure they are genuine arrangements. It is important to note that just because workers have ABNs or provide an invoice for a payment does not of itself make them independent contractors.

2. Know the relevant laws

Employers need to be aware of the Independent Contractors Act, the Fair Work Act and the common law. The correct characterisation of labour is also relevant for worker’s compensation, superannuation, income tax and payroll tax.

3. Review case studies to realise the extent of the issue

It is important that employers make themselves aware of scenarios where businesses have been caught out to understand the extremities the issue can cause. The FWO has created a tool to assist in understanding whether an independent contractor is genuine. The case studies show different employment arrangements to show the differences between independent contractors and employees. Available here.

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