Ombudsman prosecutes “sham contractors” –
What it means for your business

Monday, 1 November 2010

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The Fair Work Ombudsman (the FWO) is prosecuting two labour-hire companies, its directors and their employer client for allegedly engaging school-age children in a “sham contracting” arrangement.

What is a sham contract?

Sham contracting is where an employer seeks to treat one or more employees as independent contractors, as a means of avoiding the payment of entitlements that would otherwise be payable to those employees (such as award rates of pay, superannuation and leave entitlements).

Under the Fair Work Act 2009 there are provisions against sham contracting. Inspectors from the FWO have the power to take employers to court for breaches of these provisions and to seek penalties and compensation in relation to same.

In addition, if an employee is dismissed in relation to a sham contracting arrangement a union that represents that employee also has the ability to bring the matter before Fair Work Australia for dispute resolution.

What is the background to this case?

Between 2004 and 2008, the employer, Blue Steel Corporation Pty Ltd, trading as Pretzel Bakehouse, engaged three 15 year old children through two different labour-hire companies -  Contracting Solutions Australia Pty Ltd and Labour Contract Solutions Pty Ltd.

In each case the children were asked to sign an “agreement to contract” and were told they would be engaged as independent contractors.

The FWO is claiming that the working arrangements breached the sham contracting provisions of the (then applicable) Workplace Relations Act 1996 (Cth). The FWO argued that in each case the workers had no intention or comprehension of acting as self-employed independent contractors not ’bound by the constraints of the wages system’.
The FWO is seeking compensation for the alleged underpayments as well penalties against each of the two labour-hire companies, their directors and the host employer.

How can you distinguish between employees and independent contractors?

There isn’t always a clear distinction between an employee and an independent contractor, and assumptions about what category a person fits into are to an extent naturally subjective.

However, there are a range of factors which, while not individually determinative, can give a clearer idea of which of the categories a working relationship is likely to fall into.

1. Nature of Engagement

Independent contractors work under a contract to perform a particular job or to provide services for a specific period of time, while employees are generally employed over longer (and generally, indefinite) periods of time, and have more general job descriptions.

2. Control

The degree to which a party controls the nature of their work and the manner in which that work is performed.

The degree of control tends to be lower for employees and higher for independent contractors. Independent contractors generally have the ability to decide how and when work is to be carried out and to determine the degree of expertise needed for particular jobs. Employees, on the other hand, are required to obey all ‘reasonable and lawful’ directions from their employer, including those made in relation to the time and manner in which work is performed.

3. Exclusivity

The degree to which one party is restricted in his/her ability to work for someone other than their employer/principal. This tends to be higher for employees (who generally work exclusively for a single employer), and lower for independent contractors (who often perform services for a number of organisations or individuals).

4. Mode of Remuneration

Whether a party is paid through a fixed salary, plus applicable incentive payments (employees), or whether remuneration is calculated by reference to the volume of work performed (independent contractors).

5. Administration of Finances

Whether an individual tends to their own financial affairs; for example, the deduction of tax, payment of superannuation and insurance (independent contractors) or whether this is done by another party(employees).

6. Outwards appearances

Whether a person is required to wear a uniform, and if so whether this is intended to hold the individual ‘out to the world’ as a representative of the organisation for which they work (employees) or whether such a uniform is primarily intended to generate goodwill for the individual (independent contractors).

7. Provision of Equipment

Whether an individual is required to provide their own “tools of trade” and uniform (independent contractor) or whether these are provided by the organisation for which they work (employee).

8. Financial Risk

Employees do not generally adopt any of the financial risk taken on by their employers whereas independent contractors do as they are effectively self-employed and running their own business enterprise.

9. Delegation

Whether an individual has the right to delegate work and to engage or employ other persons to perform this work (contractor)or does not have this ability(employee).

What this case means for your business

This FWO prosecution highlights the importance of paying close care to your contractual arrangements with employees and contractors. By ensuring that working relationships are properly documented and administered, organisations can highlight and minimise potential legal exposure.

How HWL Ebsworth can help

HWL Ebsworth’s Workplace Relations and Safety practice group is focused on achieving results that reflect the business needs and strategic goals of our clients. We understand that in the workplace, the right outcomes require more than just strict 'legal' advice. We see ourselves as partnering our clients in achieving legal compliance, strong business performance and the fostering of harmonious workplace relationships.

If you wish to take advantage of independent contractor arrangements, we can be of assistance in highlighting ways in which these arrangements can be administered in a lawful, practical and effective manner.

Alternatively, if you have existing independent contractor arrangements we can review your standard contracts and advise on your procedures.

If we can be of assistance in relation to this or any other matter, or if you have any questions in relation to the content of this e'News, please do not hesitate to contact a member of our team at the details below.

Click here for further information on HWL Ebsworth's Workplace Relations & Safety Group.