HR manager fined for sham contracting

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In a recent Federal Magistrates Court decision, a Human Resources manager was found liable for breaches of employment laws regarding non-payment of wages and engaging in “sham contract” arrangements.

Sham arrangements occur when an employer tries to disguise an employment relationship as an independent contracting association to avoid paying workers their rights and entitlements.

In the case Fair Work Ombudsman (FWO) v Centennial Financial Services Pty Ltd (2010), former HR manager of Centennial Financial Services Christopher Chorazy was fined $3,750 for his role in breaching the Workplace Relations Act 1996.

In 2007 Centennial employed a number of corporate associates to perform sales duties while being on a minimum wage salary. However, after experiencing financial difficulties, the group of associates were asked to become contractors by signing a “Sales Consultancy Agreement”, whereby they would be remunerated on a commission-only basis, and stripped of employment benefits.

Given the sales roles were essentially unchanged FWO found Centennial breached the act by:

1.       Underpaying the Corporate Associates, and failing to recognise other statutory employment entitlements;

2.       Misrepresenting to the individuals that the agreement was a contract for services, when in fact it was a contract of employment; and

3.       Dismissing employees for the purpose of engaging them as independent contractors to perform substantially the same work they had previously performed as employees.

Rolf Mertes was the sole director and shareholder of Centennial Financial Services and was responsible for the day-to-day management and operation of the (since liquidated) business. The director was fined $13,200 for instating the sham contracts, but the magistrate found the HR manager was also liable.

Chorazy argued that he was at no stage consulted by Mertes, nor was his opinion sought in relation to the proposed changes to the contracts; rather, he was simply told what was going to happen. He argued that he therefore had no reason to consider the legality, or otherwise, of the plans.

The court accepted Chorazy was “following instructions” and had limited control over the ultimate actions of his employer, but found the HR manager had a responsibility to ensure the company complied with workplace relations laws by advising senior management of the relevant workplace laws.

Federal magistrate Robert Cameron, although accepting the argument, confirmed that ignorance of the legal effect of one's conduct was not a valid defence.

A spokesperson from FWO told Human Capital between 1 July, 2010 and 31 March, 2011, the Fair Work Ombudsman investigated 111 matters regarding potential contraventions of sham contracting provisions.

With the rising number of complaints, FWO announced in April of this year that the department would be conducting audits to assess the degree to which workers engaged by independent contracts should have more properly been considered employees.

The cleaning services, hair and beauty and call centre industries were selected for audit and the results of the campaign are soon to be released.

Additionally, this week FWO released an online case studies tool against which employers can test their work arrangements.

Knowing when to employ someone as an independent contractor or as an employee is not always straightforward, and understanding the difference is important to prevent your business from being held accountable for sham contracting.

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