What makes a sham contract?

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What makes a sham contract?

Sham contracting arrangements are unlawful under the Fair Work Act 2009 (the Act). Under the Act an employer cannot:

1. Misrepresent an employment relationship, or a proposed employment relationship, to be an independent contracting arrangement.

2. Dismiss, or threaten to dismiss, an employee in order to re-engage that employee as an independent contractor to perform substantially the same work.

3. Knowingly make a false statement with the intention of persuading a person to enter into an independent contracting arrangement.

The relevant authorities view sham contracting as where employer’s try to disguise an employment relationship as an independent contracting arrangement to avoid paying legal minimum rates of pay, tax, and entitlements, such as annual leave and sick leave.

Arrangements such as these are not genuine and may be regarded as sham contracting.

However, a great deal of so called sham contracting arrangements occur because employers fail to understand the true nature of the relationship, rather than because there is an intentional effort to evade anything. Therefore, even those who are ignorant of the sham contracting provisions may be caught out and face the prospect of costly litigation, penalties and claims for compensation.

Recent decisions in both the Federal Magistrates Court and the full Federal Court illustrate a renewed focus on the issue of sham contracting, highlighting the risks facing small business in particular.

A report has recently found that around 13% of self-defined contractors in the building and construction industry are possibly misclassified the same is no doubt true for other industries.

Key factors that point toward an employment relationship include where there is no capacity for the worker to delegate their work to third parties, and where the worker is paid for time worked rather than for achieving a particular outcome.

Importantly, the parties’ characterisation of the relationship (including the arrangements made for tax, superannuation and insurance) is not determinative, and employers must ensure that the parties’ conduct throughout the engagement actually reflects the intended relationship. This is important even where workers are engaged via a corporate entity, as a court may ultimately find that the worker in truth has a contract with the “employer” directly.

What can employers do to protect themselves from possible penalties of up to $51,000 per contravention?

First, review any existing arrangements to determine if there are any contractors engaged by the business that may in truth be employees.

Strategies can then be developed to rectify these issues without expensive litigation.

Secondly, ensure that the conduct of the parties is consistent with the intended relationship as despite what the contracts might say, the true character of the relationship will largely be determined by how the parties behave.

Source :

This Article was written by John Ruddell, Employment Relations Adviser and reprinted by Employsure. Employsure is a Premier Partner of VeriSure.

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