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
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
Are all your contractors really contractors?
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Long experience representing many of Australia's leading employers has taught us that in employment litigation the identity of an employee's representative is a major factor in how employee litigation runs.
Australian employees receive certain entitlements (such as annual leave and superannuation) where contractors do not.
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