What is sham contracting?
Sham contracting is when an employer misrepresents what is really an employment relationship as an independent contracting arrangement. This means the contractor who should be paid as an employee potentially misses out on entitlements such as award pay rates, superannuation, workers' compensation and leave.
Employers should be wary of using contracting arrangements which could be construed as sham contracting.
Case in spotlight: What can happen?
In the case of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (Federal Court, 2017), Quest operated a business that provided serviced apartment accommodation and employed two housekeepers.
The Manager of Quest, arranged for Contracting Solutions Pty Ltd, a labour hire business, to take over the employment of the housekeepers and hire them back to Quest, doing the same work as before. The employees were not given any real option – they were told that in future they would be working for Contracting Solutions.
After conversion, the two housekeepers were paid a flat rate of pay by Contracting Solutions that didn't make provisions for entitlements such as overtime, and Saturday, Sunday and public holiday penalties.
The Fair Work Ombudsman argued that the "conversion" of the employees deprived them of basic protections and conveniences that employees are ordinarily entitled to, and that by representing to the employees that they ceased to be employees and became contractors, they misrepresented the true position because the "conversion" was a sham, and in fact they never ceased to be employees of Quest.
The Court agreed, and imposed fines totalling $58,740 against Quest and Contracting Solutions, as well as against a Manager of Quest personally, for breaches of the Fair Work Act through deliberately imposing sham contracting arrangements on the employees.
Particular risk factors for sham contracting are converting existing employees to contractors, and engaging labour which is low-skilled (cleaners, housekeepers, trolley collectors, labourers) as contractors rather than employees: both scenarios lack credibility as genuine commercial contracting arrangements where the contractor is really running their own business.
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.
