Are your contractor arrangements a sham?
In a clear indication of the need to make sure your contractor arrangements are genuine an employer has been fined $313,500 by the Federal Circuit Court for engaging in sham contracting.
What is sham contracting?
A sham arrangement under the Fair Work Act 2009 (Cth) (the FW Act), is where an employer misrepresents to a worker that the worker will be employed as an independent contractor, when they ought to be employed as an employee. To put it another way, the employer disguises the employment relationship as that of an independent contracting relationship. This effectively, deprives the employee from receiving statutory minimum entitlements such as annual leave, penalty rates, allowances, overtime and superannuation.
However, determining whether a worker is an employee or independent contractor is by no means black and white.
Why was the employer found to be engaging in sham contracting?
On 20 June 2014, Judge O’Sullivan imposed a significant penalty on the employer in the decision of Director of the Fair Work Building Industry Inspectorate v Linkhill Pty Ltd (No.9). Linkhill Pty Ltd (Linkhill), a company within the Roy Morgan Group, was penalised by the Court for deliberate contraventions against the Workplace Relations Act 1996 (Cth) (WR Act) and the FW Act.
The Court held that Linkhill had engaged in deliberate sham contracting arrangements with 10 workers between the period 2007 to 2010. The workers were engaged by Linkhill to renovate premises located in Flinders Lane in Melbourne. There had been a number of proceedings before the Court in relation to this matter. In December 2013, the Court held that there had been 139 contraventions of the WR Act, the FW Act and a number of applicable industrial instruments by Linkhill. The contraventions included, depriving workers of the benefit of employment including their minimum statutory entitlements (such as leave, allowances, penalty rates, redundancy and superannuation).
This resulted in an underpayment of wages of approximately $153,000 to the relevant workers.
When considering whether the workers were ‘employees’ as opposed to ‘independent contractors’ the Court looked at the ‘totality of the relationship’ and a number of criteria. Ultimately, the Court determined that the workers:
- did not have the right to exercise control over the manner in which the work was performed. The workers were directed as to the time and location in which to perform the work and Linkhill supervised the performance of the work on a daily basis;
- could not delegate their work to another person or company; and
- whilst employed with Linkhill they did not promote their services to the general public.
In addition, the workers were required to have an ABN and the invoicing for work undertaken was imposed on them by Linkhill. Furthermore, the invoicing did not show work for tasks completed, but rather the hours worked.
In light of the above considerations, the Court held that this arrangement was not indicative of a true independent contractor relationship.
Importantly, the Court considered that Linkhill’s conduct contributed to the penalty imposed. Linkhill throughout the proceedings continued to deny liability or demonstrate any remorsefulness for their actions.
Take Home Message for Employers
In light of this decision, employers ought to:
- review their current contractual arrangements. Consider the true nature of the relationship between the employer and the contractor and determine if the person may in fact be an employee, despite the intention of the parties;
- review the process for engaging employees and contractors with the business and the criteria for determining if a person is an employee or contactor. It is important to not only consider arrangements in relation to remuneration, but also matters such as taxation, superannuation and workers’ compensation insurance; and
- take steps to fix any issues. This may include developing appropriate procedures, processes and templates to determine the appropriate categorisation of workers.