Sham Contracting - what's the deal?

​Sham Contracting – is it really a big issue?  The Federal Government recently announced that the Fair Work Ombudsman will receive $2.3 million each year for the next four years to establish a unit dedicated to addressing the problem so yes, it is considered a major problem.  But what is sham contracting and how do you make sure your business isn’t involved in it?

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SHAM CONTRACTOR OR GENUINE EMPLOYEE?
Independent contractors are a necessary requirement for many businesses and are a legal option that employers are entitled to utilise.  It’s when an employer starts to treat a genuine employee as an independent contractor when they’re not that a business can face trouble with the FWO.  Unfortunately, there are less ethical employers that will deliberately institute sham contracting agreements as a way of avoiding obligations in relation to paying employee entitlements.  Some employers may institute the process innocently thinking they are doing the right thing.  Either way, it will be deemed illegal as the Fair Work Act 2009 states that an employer must not:

• Claim an employee is an independent contractor when they’re not
• Make false statements to convince an employee to become an independent contractor
• Dismiss, or threaten to dismiss an employee for failing to agree to become an independent contractor
• Dismiss an employee and then re-hire them as an independent contractor to do the same work.

 
WHAT’S THE DIFFERENCE?
How do you know the difference between an employee and an independent contractor?  Well there are some common factors that may contribute to determining whether a person is an employee or independent contractor:

Source: Fair Work Ombudsman

A TWO YEAR UBER RIDE
Just over a week ago, the Fair Work Ombudsman ruled that Uber drivers were not employees which means that drivers are deemed to be running their own businesses according to the ATO.  This investigation into Uber was established to determine whether or not it was guilty of sham contracting.  It took two years with the FWO ultimately finding that the relationship between Uber and its drivers was not characterised as an employment relationship.  One of the key factors in the decision was that for an employment relationship to exist, “the courts have determined that there must be, at a minimum, an obligation for an employee to perform work when it is demanded by the employer.”   The FWO decided this obligation was not present in the case of Uber and it’s drivers.

Criticisms by Uber drivers and union officials aside, this decision has wide reaching ramifications for Uber in that they will not be required to pay workers entitlements such as minimum wage, annual leave, superannuation and sick leave regardless of the hours they spend on the job each day. Additionally, Uber drivers will have unfair dismissal cases rejected as this avenue will not be open to them as independent contractors.  And whilst this decision is based solely on Uber, it does set a framework for the ‘gig economy’ industry meaning many more workers will not have employee protections.

Consider the ramifications had the FWO determined that the drivers were in fact employees.  Uber would have been liable for all outstanding employee benefits and would have been exposed to significant fines – up to $12,600 for individuals per contravention and up to $63,000 for a company per contravention.  Ouch!

Ensuring you understand the difference between an employee and a legitimate contractor is vital to protecting your business and meeting your employer obligations.  If you are unsure as to the status of your employees or want to ensure you have the correct employment contracts in place, please contact the HR Staff n’ Stuff team – we are here to help when you need us.

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