Are You At Risk of Sham Contracting?

Online food delivery competitor Foodora has been accused of sham contracting its own employees and now faces legal action launched by Australia’s Fair Work Ombudsman. 

As business opportunities increase in Australia more employers turn to flexible and intuitive ways to cut costs and maximise profits, which can sometimes lead to cutting corners and the underpayment of employees. It is important for an employer to enter into valid employment contracts with its employees, as it will assist them in avoiding the risk of being accused of sham contracting. 

What is Sham Contracting? 

Sham contracting is an illegal method of employment under section 357 of the Fair Work Act 2009 (Cth), where the employer misrepresents the employee as an independent contractor. Any employer that makes such misrepresentation of the employment relationship is liable for penalties under that Act. Penalties for sham contracting include sanctions made against the employer and financial penalties up to $54,000.00 for each contravention. 

Sham contracting is typically instituted by an employer for their own benefit as it allows an employer to avoid being responsible for an employee, or to avoid paying an employee their entitlements (such as superannuation, worker’s compensation and leave). More likely than not a sham contract is entered into by an employer either knowingly to avoid their employer obligations, or because of an employer’s recklessness in considering whether or not the individual was an employee. One recent example of potential sham contracting is by the online food delivery business, Foodora. Online food delivery businesses are expanding worldwide giving consumers a quick and efficient food experience. The concept of having all types of food delivered to you wherever you are is a great idea and will only keep developing but a non-traditional approach to staffing has left these types of businesses subject to legal action brought against them for sham contracting. 

If an employer is not careful they can be liable for serious penalties and so it is important that an employer abides by their employment obligations and responsibilities. 

The Differences between an Employee and Independent Contractor? 

Before entering into any employment contract it is critical for both the employer and employee to understand the difference between an employee and an independent contractor. The main factor that differentiates between the two is the control that the individual has over their work responsibilities and obligations. 

The characteristics of an employee are: 

• Any employee working for an employer receives at least minimum entitlements – paid leave, long service leave, worker’s compensation, superannuation. 
• An employee is not responsible for paying for their own tax, an employer will deduct the income tax from an employee’s wage/salary. 
• An employee typically only works for one business. 
• An employee has no control over what type of work to be completed as it is controlled by the employer. 
• An employee works according to standard or set hours. 

The characteristics of an independent contractor are: 

• A contractor is essentially their own employer. 
• A contractor control how work is to be completed and how long the work will take to complete. 
• Contractors are not restricted to one business but are able to work for multiple businesses/people. 
• Contractors do not have set hours of work instead they agree on how many hours it takes to complete a job. 
• Contractors have high responsibility and liability for their work or injury and need to have their own insurance cover.
• Contractors are responsible for filing their own tax and GST. 
• A contractor has an Australian Business Number (ABN) and submits invoices. 
• Unlike employees, contractors receive no entitlements and pay for their own superannuation. 

Actions to Take as an Employer to Minimise Risk 

As an employer, it would be prudent to review all existing contractual arrangements to ensure that you have not unknowingly misrepresented your employee as a contractor. It is important when hiring an employee that you confirm with them the details of the work and type of work that is required of them throughout their employment contract so that there is no confusion about the employment relationship. You will also need to be aware and up to date with any entitlements and payments that you owe to the employee.