The rapid rise of concepts such as the gig economy has seen a significant shift in our understanding of the differences between independent contractors and employees. The distinction between the two is now more complex and can be difficult to discern, but regulatory bodies have made it clear that they will not tolerate the intentional mischaracterisation of employment relationships as a means of depriving genuine employees of their entitlements.

There have been numerous cases in recent times that have resulted in businesses being ordered to pay significant penalties for engaging in sham contracting arrangements to avoid paying employment entitlements such as overtime, allowances and penalties – as well as leave.

For example, in January 2019, two labour-hire companies were penalised more than $200,000 for engaging in a sham contracting scheme that resulted in workers being paid less than their statutory employment entitlements (see Fair Work Ombudsman v Care Providers Pty Ltd & Ors [2018] FCCA 3771). The director of the companies and a consultant who was responsible for the engagement of the workers were also personally penalised.

In another example, the General Manager of a labour-hire business was fined $43,000 for his direct involvement in contraventions of the Fair Work Act 2009, including sham contracting arrangements (see Fair Work Ombudsman v Raying Holding Pty Ltd & Anor (No. 3) [2018] FCCA 668).

The Fair Work Commission (the FWC) is also alive to these issues and in Prosdocimi v Addiction Treatment T/A Dayhab [2019] FWC 4586, it referred an employer’s suspected sham contracting arrangements to the Fair Work Ombudsman (FWO) for further investigation.

In this decision, the FWC had been asked to determine a jurisdictional objection raised by an employer in a claim for unfair dismissal brought by a former employee. The employer claimed that the employee had been an independent contractor for the majority of her employment and had therefore not reached the minimum employment period in order to be protected from unfair dismissal.

The FWC dismissed the employer’s jurisdictional objection, finding that the employee was not a true independent contractor for the following reasons:

  • the employer issued rosters which named the employee and required her to attend the workplace for her designated shifts;
  • the employee’s position description showed little opportunity for the employee to exercise control over how she performed her work;
  • the employee was restrained from working in competition with the employer;
  • the employee had no right to delegate or sub-contact her work;
  • the employee was required to wear a uniform which was provided by the employer;
  • the employer provided all tools and equipment to the employee; and
  • the employee had not been involved in any activity which required her to take a risk in order to pursue a profit, or in any business with other customers who might purchase her services.

The FWC gave little weight to the fact that there was an independent contractor agreement and that the employee was paid on production of invoices, noting that these matters were consistent with the type of relationship that the employer was trying to achieve. It found that the employer could not alter the true nature of the relationship by seeking to put a different label on it, and that this was a clear case of sham contracting.

Whilst the matter has been remitted back for hearing of the employee’s claim for unfair dismissal, the FWC took the matter a step further and referred it to the FWO to investigate its concerns that the employer may have a number of other workers engaged in similar arrangements.

As can be seen from the examples set out above, if the employer is found to have engaged in sham contracting, it faces significant penalties.

Lessons for employers

This recent decision should serve as a timely reminder for employers to review any independent contractor arrangements that they have in place and to ensure that they are genuine arrangements.

The FWC can and will work with the FWO to stamp out sham contracting and these recent decisions have shown that Courts are willing to impose more significant penalties to send a message to other employers that this will not be tolerated.

As a refresher, we note we have previously discussed at length the key differences between an independent contractor relationship and an employment relationship – see our blog Ride with me – Food delivery bicycle riders and sham contracting.

Information provided in this blog is not legal advice and should not be relied upon as such. Workplace Law does not accept liability for any loss or damage arising from reliance on the content of this blog, or from links on this website to any external website. Where applicable, liability is limited by a scheme approved under Professional Standards Legislation.