Staffing costs can be a pain right? Engaging contractors can be a great solution, but beware! Last week, the Federal Magistrates Court handed down penalties in the first "sham contracting" prosecution brought by the Fair Work Ombudsman.
Centennial Financial Services was fined $13,200 for dismissing employees then rehiring them in identical roles but as "independent contractors". But wait for it –the HR Manager who was "just following orders" was also personally fined $3,750.
Independent contractors –not likely!
The Court found that, once rehired, the employees' duties were pretty much identical and they were still required to devote themselves exclusively to the work of Centennial. Although the "contractors" were expected to generate their own sales leads, any new business prospects became clients of Centennial. The "contractors" also had Centennial mobile phones, office facilities and business cards.
In fact, aside from slightly more flexible office hours, the only real change was that the "contractors" were paid commission only and stripped of all entitlements. The Court found that they were collectively underpaid some $38,000 compared to the (then) federal minimum wage.
What do you need to know?
The Fair Work Act 2009 prohibits "sham" independent contracting arrangements. A company must not misrepresent an arrangement as independent contracting, when in fact the relationship is one of employer and employee, and must not sack an employee to engage them as a contractor.
Why does it matter?
Sham contracting carries a penalty of up to $33,000. Employees are entitled to benefits such as annual leave, long service leave and personal leave which independent contractors aren't. Employees are also entitled to minimum pay rates under the National Minimum Wage or modern awards. Failure to comply with those obligations can result in a further fine, and a claim for back pay. Employers can also get in trouble for avoiding group tax and payroll tax by pretending that employees are really contractors.
Are all your contractors really contractors?
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