Sham Contracting: A New Era of Exploitation or Just More Regulation?

July 17, 2018
FCB Workplace Law

Contracting has long been a feature of Australian industry sectors where there is a demand for highly specialised tradespersons, operating their own businesses, providing their own labour and engaged to provide a defined service and result.

According to the latest ABS data, there were just over 1.2 million independent contractors engaged throughout Australia.

While the concept of independent contracting is not new, this form of work arrangement is no longer limited to a few highly specialised roles or industries. In recent years, we have seen the concept of contracting expand into other comparatively lower-skilled and lower-paid industries, where the arrangement often involves little more than the supply of a worker’s time and labour.

Much has been written about how the development of new technologies, combined with demands for flexible work practices and increasing commercial pressures have driven the evolution of work and, recently, seen the so-called gig economy thrive. However, the traditional independent contracting model of engagement, particularly in industries such as building and construction, continues to be a preferred model of engagement for a range of understandable reasons. On the flip side, the reach of regulation (and regulators) over contractor arrangements seems to be ever more on the rise.

Unsurprisingly, this has led to legitimate concerns around the protection of vulnerable workers from exploitation, and increased scrutiny from government regulators like the Fair Work Ombudsman (FWO) and the Australian Building and Construction Commission  (ABCC).

A common misconception still exists that if a worker has an ABN, issues invoices for services performed and is engaged under an independent contractor agreement, they will be a lawfully engaged contractor. Courts and tribunals continue to make it clear that this is not the case, even where written contractor agreements contain clear statements confirming the parties acknowledge the relationship as that of principal/contractor.

Courts generally acknowledge that there is no one-size-fits-all definition of a contractor, thereby providing flexibility to make a decision on a case-by-case basis. But this flexibility has also resulted inconsiderable uncertainty. Faced with inconsistent decisions by courts and tribunals, how do you know whether you have a genuine contracting arrangement or are inadvertently engaged in sham contracting?

A contract is considered to be wholly or principally for the labour of the person where the individual:

  • is remunerated (either wholly or principally) for their personal labour and skills;
  • must perform the contractual work personally (there is no right of delegation); and
  • is not paid to achieve a result

The Fair Work Act 2009 (Cth) strictly prohibits “sham” contracting. Specifically, employers are prohibited from intentionally or recklessly misrepresenting an employment relationship as a contracting relationship, from dismissing an employee to engage that individual as an independent contractor and from making a statement that the employer knows is false in order to persuade or influence a current or former employee to enter into a contract for services.

Those caught contravening these provisions face hefty penalties of up to $63,000 for a corporation or $12,600 for any individual who is found to have been involved in the breach. However where the creation of sham contracting is part of the underlying business model (such as systematic engagement of workers in sham contracting) a business faces massive fines ($126,000 for individuals and $630,000 for a corporation) due to changes in the FW Act introduced in September 2017 – serious contraventions for breaches of NES / wage payment provisions / record-keeping obligations.

Risks / exposure for payment of employment entitlements include:

  • minimum wage
  • overtime and penalty rates
  • annual leave
  • sick leave
  • paid public holidays
  • workers’ compensation
  • superannuation
  • payroll tax

It is also important to consider whether the arrangement exposes the business to risk under the Independent Contractors Act 2006 (Cth) Act or the Australian Consumer Law. Legislation such as this affords protection to contractors against the unfair contractual terms.

Current claims / cases being pursued:

  •  Appco Group – class action in Fed Court on behalf of a group of charity fundraisers engaged as independent contractors alleging sham contracting, claiming employment payments and entitlements – back by litigation funder
  •  Foodora – TWU pursuing unfair dismissal claims on behalf of 2 x Foodora delivery drivers who had their services as independent contractors terminated.

For anyone that is considering engaging contractors, it is essential that you seek proper legal advice concerning your risks – particularly where contractors may be working in roles that are also, or have traditionally been, performed by direct employees.  If you already engage contractors, the time to assess your risk and take steps to protect your business is now. Especially where contractor arrangements have been in place for a significant period of time and/or have not been reviewed for significant period of time.