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Sham Contracting

Monday 01, Dec 2014

‘’Recent reports on leading media platforms have highlighted the widespread, and escalating occurrence of employers treating white-collar workers across the board, like independent contractors to avoid paying them their entitlements,’’ says Trevor Rawnsley, CEO of ARAMA.

‘’In a submission to the Senate inquiry on the ways businesses are sidestepping fair work laws, it appears that sham contracting is "rife" in low-skilled and low-paid industries including cleaning, share-ride schemes, administration and construction.

In a recent landmark sham contracting case, a large company that owns and operates an apartment hotel in Western Australia engaged a third party to convert two of its housekeeper employees into independent contractors. These ‘independent contractors’ were to be paid by the third party for their labour, but would be supplied back to the original employer for the purposes of performing the same work as they had done during the period of their employment.

In considering the legal status of the triangular contracting arrangement, the Full Federal Court rejected the assertion that the housekeepers had been converted to independent contractors, and instead held that they had always remained employees of the apartment building owner.

Factors that supported the court’s finding included the fact that the housekeepers continued to wear the company uniforms and operate under the complete direction and supervision of the company following the purported conversion. Additionally, the court was unable to identify any indication that the housekeepers were operating their own businesses for profit.

The Federal Court find the company $33,000 for its ‘deliberate’ and conscious’ misrepresentation of the contracting arrangement, and a further $21,450 for threatening to dismiss a receptionist for refusing to enter into a similar arrangement.

Of note however, is that the company’s general manager was personally fined as a result of his ‘intimate involvement’ in the contravention and because he was found to be ‘largely personally responsible’ for its implementation.

The express terms of a service level agreement and/or the fact that a worker is being paid by a third party entity will not in and of themselves determine the status of the relationship. An employer may still breach the sham contracting provisions of the Act even if they are introducing a third party, such as a labour hire company, into contractual arrangements.

A court will always look to the true nature of the relationship between relevant parties on a case by case basis in determining the legal status of workers, and individuals who are intimately involved in the implementation of suspect contracting arrangements may be exposed to personal pecuniary penalties as a consequence of that involvement.

‘’Sham contracting is where a person working as an employee is told they are an independent contractor when they’re not,’’ says Rawnsley. ‘’They will also be treated like an independent contractor in some ways, for example they may be required to have an ABN and submit invoices. But sham contracting is illegal. It’s illegal to:

  • claim an employee is an independent contractor

  • say something false to convince an employee to become an independent contractor

  • dismiss or threaten to dismiss an employee if they don’t become an independent contractor

  • dismiss an employee and hire them as an independent contractor to do the same work.

‘’Sham contracting can be done intentionally or carelessly by an employer, he adds. ‘’These types of arrangements are sometime set up by employers who are seeking to avoid responsibility for paying legal entitlements to employees, and in fact, non-payment of short-term employees is a business model for some small businesses.’’

Legal Aid NSW have reported that it has found employers and their advisers have become "more sophisticated in their attempts to style what is in truth an employment relationship as an independent contracting relationship".

Workers are often engaged under a written, independent contracting agreement that states no employment relationship is created, and in fact are instructed to register ABNs.

‘’In an industry that is ideally suited to casual or short-term labour arrangements, companies and individuals operating residential and short-term accommodation businesses, should keep abreast of legislative developments and begin putting in place a compliance and monitoring strategy,’’ says Rawnsley.

"The ARAMA members resource library which is an included feature of ARAMA membership contains information to help guide members with all aspects of workplace relations, and particularly how to avoid sham contracting arrangements. The section dealing with "Employment and Wages" aids members to discern if the worker is an employee or a self-employed contractor. It's important to consider that if it looks like a duck and quacks like a duck... it's a duck.

"The ARAMA website contains checklists comparing contractors vs employees plus templates to assist members to formalise their working terms and conditions. This is a good starting point to help members avoid the risks of sham contracting. Members are however, encouraged to engage with an expert in workplace relations if in any doubt," adds Rawnsley.

"As a result of cases such as the one cited above, together with a number of parliamentary reviews into vulnerable (and often unskilled) on-hire workers, ‘labour hire licensing schemes have been proposed in Queensland and Victoria, with South Australia likely to follow suit shortly.