Sham Contracting – Know The Difference
WHAT IS A SHAM CONTRACT?
A sham contracting arrangement may arise where a business knowingly (or recklessly) tells a worker that they are an independent contractor, when the arrangement is in fact that of an employer and employee. Even if someone is operating under an Australian Business Number or invoicing the business for their work, in some circumstances, there may still be a sham contract present.
COURT’S PREVIOUS POSITION ON SHAM CONTRACTS
Historically, the courts have adopted a multi-factor test to distinguish between an employment or contractor relationship in accordance with the principles set out in Hollis v Vabu Pty Ltd (2001) 207 CLR 21 (‘Hollis’).
The main indicators considered under the multi-factor test in Hollis are as follows:
- Is the person performing the work an entrepreneur who owns and operates a business (‘First Limb’); and
- In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work? (‘Second Limb’)
In determining the First Limb, some of the indicia that will be considered by the courts include whether the alleged contractor’s business:
(a) undertakes economic activities in pursuit of profit;
(b) engages in a repetitive and continuous manner with purchasers of its services, and is promoted as a business to the public;
(c) has tangible assets and basic transactional systems; and
(d) meets regulatory requirements (including, for instance, taxation and superannuation requirements).
In determining the Second Limb, some of the indicia that will be considered by the courts include:
(a) whether the provision of work provides an opportunity for profit and risk of loss or whether it is consistent with the remuneration an employee would have received;
(b) to what extent is the payment for services negotiated commercially;
(c) to what extent is the payment contingent on a satisfactory result;
(d) who bears the risk of providing equipment or assets for performance of the service;
(e) who controls the manner in which the services are carried out;
(f) to what extent does the person providing the services use their own tools; and
(g) finally, how have the parties characterised their relationship.
RECENT HIGH COURT DECISIONS
In early 2022, two High Court decisions concerning the relationship between independent contractors and principals were delivered, which now provide clarity for businesses who engage independent contractors. In these matters, the High Court put a greater importance on the written agreement between the parties to minimise misguided claims of sham contracting against legitimate business contracts between contractors and principals.
The cases of ZG Operations & Anor v Jamsek & Ors  HCA 2 and Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd  HCA 1 were heard in conjunction with one another by the High Court, with decisions handed down on the same day. The decisions focused on the terms and conditions of a written agreement between the parties to establish whether the parties intended the engagement to be one of independent contractor and principal, or employer and employee. This is a notable departure from the courts’ adoption of Hollis.
The High Court was clear in outlining that greater importance should be given to the practical terms and conditions of the written agreement. For example, the title and parties of the written agreement hold less importance than the contractual terms themselves. The High Court also found that, so long as the written agreement sufficiently establishes the working relationship and there is no other suggestion of variation of the contract, then the previous move to consider the parties’ conduct subsequent to entering into the contract will be ‘unnecessary and inappropriate’.
If there is still uncertainty regarding the existence of a contractor agreement, after applying the above decisions, then the courts may look to consider the day to day activities between the parties to establish the intended relationship, in accordance with the principles established in Hollis.
PENALTIES UNDER THE FAIR WORK ACT
The Fair Work Ombudsmen can prosecute employers who enter into sham contracting arrangements with their workers. Civil penalties of up to $66,600 for corporations and up to $13,320 for individuals can be imposed for each breach of the sham contracting provisions.
An individual can also make a claim under the general protection provisions of Fair Work Act alleging sham contracting and the same civil penalties apply.
In addition to the imposition of penalties under the Fair Work Act, an employer may also be liable for (without limitation) payments to the employee for unpaid wages and entitlements (such as annual leave, sick leave etc.), superannuation guarantee contributions and PAYG withholding tax.
OUR ROLE IN LITIGATION AND YOUR SUCCESS
If you are looking to seek legal advice as an independent contractor, principal, employer, or employee, Ramsden Lawyers are able to assist you. We can arrange an initial consultation to assist you in navigating the procedures set out under both case law and legislation.
We also have an experienced commercial and business team with experience drafting agreements between independent contractors and principals, as well as employers and employees.
The content of this article is intended to provide a general guide to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.
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