BLOG - Sham Contracting

Kathryn Harris, FCPA, CTA

Just because an employer says you're a contractor it may not be so.

BLOG - Sham Contracting

We often get clients coming in to set up an ABN because they have been offered work as a "contractor" often these jobs are set hours, in set locations where the "business" tells the "contractor" what to do, when to do it and how to do it.

They often supply all the tools and materials as well. Usually the rate of pay is similar to what they would be paid if they were on wages.

To be honest, they aren't contractors they're employees and businesses are fooling themselves if they think this is the way to avoid keeping records and having to pay leave and other entitlements.

The Business Victoria website has some info on sham contracting which is treating an employee as a contractor to avoid having to provide entitlements and benefits. They explain sham contracting as follows:


"A sham contract is when an employer deliberately disguises an employment relationship as an independent contracting arrangement, instead of engaging the worker as an employee.         This is usually done to avoid paying employee entitlements such as superannuation, workers' compensation, leave, and certain taxes. 

         In other cases, employees are pressured to become independent contractors where they are threatened with being dismissed or are misled about the effect of changing their working arrangements.

         The Fair Work Act 2009 protects genuine employees from 'sham' independent contracting arrangements and outlines employers' obligations when establishing an employment relationship.

         Sham contracting arrangements are illegal.

   An employer cannot tell an employee that he or she is an independent contractor.

   An employer cannot dismiss or threaten to dismiss an employee in order to engage them as an independent contractor to do the same (or mostly the same) work they performed as an employee and vice versa.

   An employer cannot mislead an employee (or former employee) in order to persuade them to perform the same (or mostly the same) work as an independent contractor.

         The Fair Work Ombudsman, Fair Work Building and Construction or a union can take action against an employer for behaving like this."

The courts are taking a very firm stance on sham contracting and the fines for businesses undertaking this behavior are hefty.

In the case of Fair Work Ombudsman v Jooine (Investment) Pty Ltd & Anor the company was fined $47,520 and the sole director was personally fined $9,504. All this for what amounted to short paying their cleaner $1858.53 in a contracting arrangement when they should have been an employee. The Federal Circuit Court found that the worker was an employee because of a number of reasons including the fact that the company supplied all his equipment and materials. You can find more info on the facts of this case here.

So what does this mean for you?

If you are a business that employees staff or utilizes contractors make sure you review your contractor arrangements and be clear on what the relationship is. 

 If you are an "employee" or "contractor" check that you are being classified in the correct manner. Even if you are a contractor you may still be entitled to superannuation.

If you are still in doubt or need more information make an appointment to come in and see one of our accountants.

Kathryn Harris, FCPA, CTA

Kathryn Harris is a FCPA and a Chartered Tax Advisor. A partner in a rural accountancy practice she champions woman in their business and leadership roles.