A sham contract refers to an agreement in which an employer attempts to disguise an employment relationship as an independent contractor arrangement. This is done with the intention ofavoiding paying employee entitlements such as superannuation, workers compensation, leave, and certain taxes. Doing this not only significantly reduces costs, but also eliminates an employer’s vicarious liability for the wrongdoing of itsemployees.

However, employers should think twice before presuming they have found a loophole in the system;these arrangements are punishable under the sham contracting provisions of the Fair Work Act 2009, and companies can face a hefty fine of up to $54,000 in the event of a breach. In addition, employers may also be liable for underpayment claims, payroll tax, superannuation payments and be exposed to unfair dismissal claims.

In a recent case heard by FWC[1], it was determined that a worker had access to unfair dismissal after it was found he wasmisrepresented as an independent contractor when in reality he was an employee.The FWC stated that the employer created an independent contracting “façade” to suit its own purposes and to avoid paying employee entitlements.

The FWCrelied upon a number of factors to determinewhether the worker was an employee or independent contractor. The factors taken into account included:

5. The employer exercised control over what/where/ the manner in which work was to be performed.
5. The worker had little to no control over his start times and his finishing times
5. The employer required him to be available every day and he was prohibited from accepting paid work from others.
5. The worker did not have a website to promote his services.
6. He never subcontracted work out to others for assistance.
5. His employer’s logo was visible on the sides of the workers van. He was also required to distribute his employers contact information and pamphlets to potential customers.
5. The employer described the worker as an employee to clients.

Despite the fact that the worker was paid through a corporate structure and had his own ABN, the FWC reached the obvious conclusion that the worker was in fact an employee and not running a business of his own.

The key message from this case is that employers must know the difference between an employee and independent contractor. Employers should exercise diligence over their labour arrangements and ensure their workers are not being deprived of their legal entitlements. Generally, ignorance to the law cannot be used as a defence.

Lessons for employers              

• Knowing the difference between an employee and independent contractor is not straightforward and employers will need to look at the totality of the relationship.
• When in doubt, employers should check the FWO fact sheet indicators or seek legal advice.
• If you hire independent contractors, review all arrangements in place and ensure they appropriately engaged.
• The courts will consider the true nature of the relationship and not the description given by the parties. “The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.”- Justice Gray.