Issue 22
07. Job Matters
Sham contracting – The facts you need to know With more and more Australian businesses relying on a flexible workforce, protecting genuine employees from sham contracting arrangements has never been more important. But despite a recent crackdown from the Fair Work Ombudsman and Australian Tax Office, many employers continue to feign ignorance as to their responsibilities. Here’s what you need to know about sham contracting – whether you’re an employer or an employee. What is sham contracting?
Independent contractors Are engaged for a specific task, and decide how many hours are required to complete it
Sham contracting occurs when an employer treats an employee as an independent contractor when they’re not. They may require the employee to have an ABN and submit invoices for work done, and often rely on a contractor agreement to formalise the working relationship.
Have a high level of control over how the work is done, and may hire others to assist
Although some employers institute sham contracting agreements to avoid paying employee entitlements, it’s not always deliberate. But regardless of how the arrangement comes to be, it is illegal.
Are engaged to complete a specific task or for a specific period of time Bear the risk of profit or loss on each job. They also usually assume responsibility and liability for poor work or injuries sustained while completing the task, and therefore have their own insurance
Under the Fair Work Act 2009, an employer must not: •
Claim an employee is an independent contractor when they’re not
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Make false statements to convince an employee to become an independent contractor
Pay their own superannuation (as a general rule)
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Dismiss, or threaten to dismiss an employee for failing to agree to become an independent contractor
Pay their own tax and GST (as a general rule)
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Dismiss an employee and then re-hire them as an independent contractor to do the same work
But how do you know who’s an employee and who’s an independent contractor?
Provide their own tools and equipment Have an ABN and submit invoices for work done or are paid at the end of the project Are not entitled to paid leave
There are a number of factors that set employees apart from independent contractors. These include:
It’s important to note there’s no single factor that determines someone as an employee or independent contractor. An employee can have an ABN and invoice for work done and still be an employee, while an independent contractor may carry out the same work as an employee. To make the right distinction, you should look at all the above factors in combination.
Employees
Why do people enter sham contracts?
Independent contractors vs employees
Work standard or set hours each week (casual employees’ hours may vary from week to week)
Some employers prefer engaging people as independent contractors in the belief that they can:
Perform work under the direction and control of their employer
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reduce the overall amount of tax they have to pay;
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avoid having to accrue for leave;
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avoid paying superannuation; and
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ignore the protections given to employees by law, such as for unfair dismissal, thereby creating a more ‘flexible’ workplace.
Have an ongoing expectation of work Bear no financial risk and are covered by their employer’s insurance Are entitled to superannuation contributions paid by their employer into a nominated fund Are provided with tools and equipment, or a tools allowance by their employer Have income tax deducted from their pay by their employer
Some employers also believe that it can reduce their payroll tax obligations and workers compensation premiums.
Are paid a regular income (weekly, fortnightly or monthly) Are entitled to paid leave – annual leave, sick leave, long service leave etc, or if a casual employee, receive loading in lieu of leave entitlements
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