Australia: High penalties for sham arrangements: Are your contractors really employees?

Last Updated: 3 January 2017
Article by Clayton Payne

A business decides to engage a contractor to perform work for it. Such an arrangement is attractive to the business because of the flexibility it provides.

The purported "contractor" may also be happy with the arrangement.

What happens however if the arrangement is not what it purports to be?

What are the ramifications for the business if it is found that the arrangement is actually one of employer and employee?

These matters were recently considered by the Federal Circuit Court in the matter of the Fair Work Ombudsman v. ASAP and Another.

The Facts

The company, which it was ultimately agreed was the employer (employer) provided direct fundraising services for charities and not for profit organisations. The second respondent to the matter was the sole director of the employer.

It was alleged that the employer had falsely represented to the worker that he was engaged as an independent contractor, and among other things, had failed to pay him his minimum rates of pay.

The employer had entered into an arrangement with another company, PMA (which was also controlled by the second respondent) to engage workers to carry out relevant fundraising services. PMA in turn entered into an arrangement with another company, i.Contract, to provide administration and payment services to PMA's workers. In relation to the worker, i.Contract, among other things, was required to obtain and maintain insurance in the worker's name, create invoices for the worker's services which were issued and sent to the second respondent at PMA, and make payments to the worker.

In March 2013, the employer provided training on sales techniques to the worker, and at the conclusion presented him with various documents including one titled, "Services Agreement", and another providing instructions on the arrangement he was to enter into in order to be paid (which included applying for an Australian Business Number, and registering with a company affiliated with i.Contract, called Certica).

The parties to the matter agreed for the purpose of the proceedings, that the worker was subject to the day to day operational direction and control of the employer, exercised by the second respondent. This included directing the worker to work Monday to Friday from 8am to 5pm during the period he was employed as a fundraiser, and from 7.45am to 5pm during the period he was employed as a team leader.

The worker was initially paid $50 per day plus commission, less deductions for PAYG tax, public liability insurance and fees. As a team leader, he was paid $67 per day plus commission, less deductions for PAYG tax, public liability insurance and fees.

The parties ultimately agreed for the purposes of the proceedings that the worker was engaged as an employee, and not as an independent contractor. This was for various reasons, including the fact that the worker was required to attend training on and apply sales techniques as directed by the employer, was required to work set hours, and was subject to the day-to-day direction, supervision and control of the employer. It was also agreed that the employer and not PMA was the worker's employer for the relevant period.

The employer admitted that it had breached the "sham arrangements" provisions of the Fair Work Act.

The employer had not paid the worker the relevant minimum rate of pay for the period, nor a casual loading, also in breach of the Fair Work Act.

The second respondent admitted that he was an "accessory" to the employer's contraventions of the Fair Work Act.

The employer and the second respondent admitted to the fact that the contraventions had resulted in the worker being underpaid almost $8,000 which was paid back to the worker.

The Findings

However, the employer and second respondent were nonetheless ordered by his Honour Judge Cameron to pay civil penalties, amounting to $100,000 in the case of the employer and $24,000 in the case of the second respondent.

His Honour noted:

"It is true, as the respondents submitted, that there is nothing inherently unlawful in one person seeking to engage another to do certain work as an independent contractor. However, as already observed, it appears that the arrangement through which (the employer) operated in relation to (the worker) was a contrivance to distance (the employer) from any potential relationship with him".

It was also noted that proceedings similar to this matter had been brought against the employer previously, and admissions were made by the employer that it had treated five employees as independent contractors.


Although there were extenuating circumstances in this matter, the decision demonstrates that Courts can impose substantial civil penalties for breaches of the Fair Work Act, particularly involving sham contracting arrangements, and the underpayment of workers.

The decision highlights the need for businesses to think very carefully about how they engage workers, and in particular, whether the workers in question are in reality employees, when they might otherwise be described as contractors.

The ramifications of not considering these matters fully, could not only lead to the imposition of penalties such as those described above, but also claims for entitlements (such as for paid annual leave, paid personal/carer's leave, long service leave, etc.), superannuation guarantee contributions, and possibly even payroll tax, among other potential liabilities.

It is recommended that advice be sought when contractor arrangements are being contemplated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Clayton Payne
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