Large companies recently caught for not paying contractors their lawful entitlements. McDonald Murholme Managing Director Alan McDonald discusses employee shamming from an employer’s perspective.
See below article for further details.
What a sham: Are you doing the wrong thing?
Sham contracting is again in the spotlight, with Myer and Pizza Hut both recently busted for not paying contractors their lawful entitlements.
Sham contracting occurs when an employee is pushed into an independent contracting relationship where the individual is paid an “all in” sum inclusive of tax, leave and superannuation.
It is not lawful to pursue a contracting relationship if an employer is obliged to:
- deduct and pay PAYG taxation
- separately make contributions to a superannuation fund on the employee’s behalf, and
- provide leave in accordance with the National Employment Standard and relevant long service leave legislation.
An independent contracting relationship is lawful if the individual is genuinely an independent contractor, for example where the individual services several clients on an ad hoc basis.
Are you shamming your employees?
Employers are legally obligated to cover employee compensation insurance. If such cover is not provided, the employer could be involved in sham contracting. With that, any injuries sustained by the employee while performing a task should be covered by their employer.
When employers involves themselves in shamming, they are placing their low-paid workers at a severe disadvantage for the following reasons:
- cannot afford to have unpaid leave
- fall behind in taxation, and
- not being able to make their own superannuation contributions.
Why do employers go down the shamming route?
Employers use sham contracts to simplify management of employees by avoiding their obligations to provide tax and superannuation as well as to accrue and pay leave.
Employers may use sham contracts to avoid paying award rates and otherwise implement below-market or unlawful conditions for employees.
An employer also may pay below the award rate if they consider an employee is not covered by an award or enterprise agreement.
The nitty-gritty of the issue
Sham contracting breaches section 357(1) of the Fair Work Act 2009 (Cth) with the exception that the employer was not aware of, and was not reckless of, the employment status.
Employers who choose to involve themselves in shamming take on significant legal risks, breaching multiple areas of the Fair Work Act. The legal question of whether a relationship is a true independent contract or an employment relationship in disguise is a question of reviewing relevant factors such as the length of the engagement, the level of control by the individual, uniforms, allocation of work and methods of payment.
Courts will assess all factors to determine the true nature of the relationship.
What can you expect if you are involved in shamming?
An employee who believes they have been engaged on a sham contract will seek to ascertain whether their relationship is classed as employment or if they are genuinely an independent contractor.
Potential losses suffered in leave, superannuation and potential wages will be presented to their lawyer who will provide the employee with a clear indication of the category they fall in.
The ATO will pursue superannuation but other entitlements are recoverable in a court.
Employers can seek to claim back over-award payments, but if the court agrees the relationship is that of employment the claims tend to be valuable for the employee.
What you could be getting yourself into
From time to time, a worker may approach an employer and request to be engaged as a contractor. The employer has the responsibility to reconsider agreeing to the arrangement if they believe the working arrangement is one of employment. Employers who do not comply with their legal obligations will face penalties including:
- Penalty for failure to withhold under pay as you go. In a worst case scenario this can be as high as 100% of the amount that should have been withheld, but is most often reduced to a smaller percentage, usually either 25% or 50% depending on the circumstances that led the employer to non-compliance.
- Interest from the date that the amount should have been withheld and paid to the ATO.
Employers are advised to seek further legal advice if they are unsure of whether a work arrangement is employment or contracting.
Alan McDonald is managing director of Victorian employment law firm McDonald Murholme.
Reference: ‘What a sham: Are you doing the wrong thing’, Workplace Info, 1st February 2016.