Dodgy dealings: Getting caught for sham contracting

The annual cost of unpaid taxes on the Australian economy is $2.4bn, and the Fair Work Ombusman (FWO) has announced a crackdown on businesses engaging in sham contracting arrangements.

According to EI Legal, 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

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

FWO regularly conducts industry audits, and HC reported the decision of the Federal Magistrates Court to fine a HR manager $3,750 for his role in breaching the Workplace Relations Act 1996, whilst his employer was fined in excess of $13,000.

Ryan said sham contracting arrangements are completely avoidable, and EI Legal believes that many cases 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 any employment arrangements with all independent contractors to make sure it is a genuine arrangement. 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.

4. Seek professional advice. If you are unsure of any employment arrangement in your business seek professional help immediately.

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