Sham, to me sounds like a funny word, in fact the more I say it over and over it sounds ridiculous (you are doing that now aren’t you)? What does it mean exactly? According to my old mate Oxford Dictionary; it is something that is not what it purports to be, a fraud or hoax. Just like Billy Bob Thornton in that movie Bad Santa.
Sounds serious if we are talking about employment!
I have had a few clients in my time who have been unknowingly shamming employees and to be honest, the lines are a bit blurry so I don’t blame them for getting it wrong (and because they did, I became good at giving advice about, so thank you client).
According to our Employee Relations “God” The Fairwork Ombudsman, there are a number of factors which may contribute to determining what constitutes an employee and an independent contractor. So let’s try and remove the grey and break it down simply, because that’s the HR Guru way (you are welcome)!
A sham contracting arrangement occurs where an employer tries to mask an employment relationship as an independent contracting agreement, usually done so companies can avoid responsibility for employee entitlements = dodgy.
To understand the differences, let’s first look at what an Employee is:
- Performs work under the direction and control of their employer on an ongoing basis.
- Works standard or set hours (bear in mind, casual employees hours may vary).
- Has an ongoing expectation of work (unless employee is employed for a specified fixed term or specific task).
- Receives Superannuation entitlements from their employer, to employees nominated superannuation fund.
- Employer generally would provide tools and equipment for the employee to conduct their work, a tool allowance may also be paid by the employer.
- Has income tax deducted by their employer.
- Bears no financial risk – that’s all yours as the employer!
- Are paid regularly (for example, weekly/fortnightly/monthly, unless you work for 7-Eleven and then you might get paid every 8 weeks or so)
- Are entitled to receive paid leave (for example, annual leave, personal/carers’ leave, long service leave) Casual employees may receive a loading in lieu of leave entitlements.
- Is covered by Employer’s insurance for injuries sustained in the workplace.
Seems pretty black and white so far… So let’s move onto Contractors:
- Unlike an employee, a contractor has control of the hours they work as agreed to get the job done and a level of control in so far as how the job is performed. They can also refuse to do work if it is outside the scope that has been agreed to.
- Are generally engaged for a specific task or period so therefore the expectation of ongoing work is removed.
- Can do work for others at the same time they are working for you.
- Pay their own superannuation, which brings us to our first grey area. There are circumstances when an independent contractor may be entitled to be paid superannuation contributions. “When might that be” I hear you ask. Well, I’m glad you did.
o Basically if your contractor has an “individual agreement” the company will pay the superannuation. If your contractor has a “company agreement” the contractor will their own superannuation.
o An individual agreement means that your contractor is registered with the ATO as an entity trading as a business and as such, will have an ABN (Australian Business Number).
o A company agreement means your contractor has a company registered with ASIC (Australian Securities and Investments Commission) and will have an ACN (Australian Company Number) in addition to an ABN.
- Uses their own tools and equipment (NB. alternative arrangements may be made within a contract for services)
- Generally have their own insurance policy covering any injuries sustained while on the job – additional advice here *Ask your contractor to provide documentation, seriously, you will be glad you read this bit*
- Pays their own tax and GST to the Australian Taxation Office.
- Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
- Does not receive paid leave.
Further, the Fair Work Act states;
- As an employer you cannot misrepresent an employment relationship as an independent contracting agreement. Nor can you;
- Make a knowingly false statement to coerce or influence an employee to become an independent contractor.
So there you have it, sham contracting is bad. And it’s illegal (you can be fined up to $54,000 if found guilty of doing it and that’s a really good holiday, so don’t do it).
If you work in the building and construction industry then beware the ATO is onto you as they are losing millions every year in tax income through sham independent contracting arrangements.
If you need help navigating this grey and swampy area of contractors then give us a call, we can assist you with independent contractor agreements and advice on whether or not your current arrangement may be considered a sham. For more information on sham contracting check out the Fair Work website =>
This blog was written by resident HR Guru Kristy Hansen.