‘Sham’ might sound like an odd word to some people. The Oxford dictionary meaning of ‘Sham’ explains it as something that is not what it purports to be, that is, a fraud or hoax. Sham contracting is considered somewhat of a hoax, or fraudulent, because a person is working as an independent contractor, when they’re in fact in an employment arrangement with the business that they’re working for.

In many cases, employers are unwittingly engaging people in what are considered sham contracts, perhaps because it’s a bit of a grey area, and many are not realising there are key differences between employees and contractors. To help make this distinction clear, we’ve outlined the differences below.

Who is considered to be an Independent Contractor?

Typical characteristics of an independent contractor include:

  • They are engaged for a specific project or task;
  • They work from a scope, and control their hours and how the project or task is completed;
  • They will set their own hourly rate;
  • They will have an ABN (Australian Business Number) and/or ACN (Australian Company Number);
  • They work for multiple businesses at the same time, and not more than 80% of their time is spent with one single client;
  • Their work is billed to the business for their hours by an invoice;
  • They will have their own insurances, such as worker’s compensation, public liability and professional indemnity insurance;
  • They usually provide their own tools, including their own vehicle, though in some cases alternative arrangements may be made within a contract for services.

Independent contractors typically pay their own superannuation, however through some agreements, it may be paid by the by the employer. Independent contractors do not accrue leave entitlements and they pay their own tax and GST to the Australian Taxation Office.

Anyone who does not fit the above criteria, is considered an employee.

Not sure if your contractors are genuine contractors?

If someone is working for a business as an independent contractor but they:

  • Perform work under the direction and control of their employer on an ongoing basis,
  • Work standard or set hours,
  • Have an expectation of ongoing work, and/or
  • Are provided tools and equipment to conduct their work,

Then they are in an employment arrangement rather than a contractor arrangement, and this would likely be considered sham contracting.

Features of an employment relationship

Employees should have an employment agreement, and are directly engaged by their employer on an ongoing basis, with regular or set hours.

Employees must receive superannuation paid by their employer, and have tax deducted and paid to the ATO on their behalf by the employer. Employees are paid regularly and receive various leave entitlements (unless they are a casual). Employees are covered by their employer’s insurances, and are provided with the tools required to complete their job.

Employers must never claim an employee is an independent contractor, coerce an employee to become an independent contractor, or dismiss or threaten to dismiss an employee if they don’t become an independent contractor.

If employee is dismissed from their position within the business, the employer cannot rehire that person back as an independent contractor to do the same work.

Risks of Sham Contracting

Sham contracting can be intentional and used as a way to avoid the responsibilities of paying for legal employee entitlements, or it can be entered into unknowingly when an employer doesn’t understand the correct terms of an independent contractor. Either way, sham contracting is illegal, and if caught, employers found to be involved can face fines of up to $12,600 for individuals, per contravention; and up to $63,000 for a company, per contravention.

This year, the Federal Government has invested millions of dollars of extra funding into investigating sham contracting arrangements. Now, more than ever before, employers must ensure that their business is compliant.

If you have independent contractors employed by your business, or if you are thinking of hiring an independent contractor and want to ensure they comply, get in touch with our team today.