Contractors: A Life of champagne or a life of Sham – Pain?

With all the benefits to hiring an Independent Contractor, it is no wonder that passing an Employee off as one to avoid paying entitlements under the Fair Work Act 2009 (Cth) (FW Act) and Modern Awards is so tempting… and so costly.

For highly specialised work such as that in building and construction or for one-off jobs requiring technical experience and skill, Employers typically need not go any further than googling ‘Independent Contractor’ for the perfect solution. With their exclusion from traditional Employee benefits such as annual leave and allowances, flexibility when it comes to working arrangements not to even mention the fact that they come with their own tools; it is easy to see the appeal of hiring an independent Contractor for short term, specialised work.

The Courts have never been shy about handing down significant penalties to Employers for instituting these ‘sham contractor arrangements’ which more often than not substantially disadvantage their Employees. Under the FW Act, Employers are prohibited from misrepresenting an Employment relationship as one of an Independent Contracting relationship. Penalties for contravening these sections can be as high as $10,800 for individual directors and as much as $54,000 for the Company per breach.

Avoiding liability for Sham Contracting can seem daunting to Employers, often unaware that there are defences which may be applied in such circumstances or even that a ‘sham contracting’ problem exists at all.

A ‘Sham Contracting’ claim can be defended if the following elements are met:

  1. That the Employer or person who contravened the FW Act, did not know that they had done so
    when the representations were made; and
  2. That they had not acted recklessly as to whether the contract was one of Employment or a
    Contractor Agreement.

The Federal Circuit Court of Australia’s decision in Director of the Fair Work Building Industry Inspectorate v Bravco Pty Ltd & Ors (No.2) (2014) is one such example, where a Manager and her Employer were able to establish a successful sham contracting defence by satisfying the court of both elements.

They satisfied the first element by establishing that they had a genuine belief that the workers (who were actually Employees) were legally Independent Contractors at the time the representations were made.

The Court found the second element of the defence was also satisfied as the Employer could prove they took steps to prevent any wrongful belief that the workers had been properly engaged as Contractors; such as by having the arrangement audited by the Australian Building and Construction Commission (ABCC) for compliance and eventually converting the workers to Employees to ensure legal compliance. Subsequently, the ‘sham contracting claim’ failed and the company was not found liable.

The key factor which saved the Employer from significant financial liability in this instance was the fact that they took steps to become informed and investigate the legality of the working arrangements by seeking specialised advice and taking steps to correct any breach of the FW Act.

When sham-contracting issues arise seeking professional Employment Law advice and taking quick decisive action can make all the difference.

NB Lawyers are offering those in the Construction and Building Industry a legal consultation.

For further information please contact Jonathan Mamaril, Principal on 07 3876 5111 or email [email protected].

Written by
Jonathan Mamaril
Principal & Director, NB Lawyers – the Lawyers for Employers
07 3876 5111
[email protected]