Understanding “Sham Contracting”

and how to protect your business

AFG Webinar 21-04-11Richard Breden

Partner FCB Workplace Law

FACTSFWO v Centennial Financial Services

• Centennial Financial Services re-engaged employees, who sold and distributed the company’s financial products, as independent contractors on a commission only remuneration package.

• There were no changes in duties performed and no change in the reporting structure or hours they were expected to work.

• They were not paid entitlements such as annual leave or superannuation and were required to submit invoices for payment.

DECISION

• By purporting to re-engage ‘Corporate Associates’ as independent contractors Centennial had breached the Workplace Relations Act s901 prohibition against sham contracting.

• HR Manager and Directors were held to be personally liable under s728 Workplace Relations Act.

• It was irrelevant that the HR Manager was essentially a ‘typist’ and was unaware of the unlawfulness of the new arrangements.

[The WR Act Provisions are similar to those under s357, 358, 359 Fair Work Act]

Contractor or Employee?• ‘Corporate Associates’ held to be employees on the basis that

Centennial:

– Gave them work, retained ownership of any clients they introduced;

– Required they attend the office daily between specified hours;

– Supervised their finances; and

– Required exclusivity.

• Other indicia: Centennial provided Corporate Associates with mobile phones, office facilities and business cards, and the Corporate Associates represented themselves as emanations of the Centennial group of companies.

Centennial Financial Services

Independent Contractor

Employee

Indicator

Hours of work

Degree of Control

Expectation of Work

Risk

Employee

Generally works standard or set hours

Performs work under the direction and control of their employer on an ongoing basis

Has an ongoing expectation of work

Bears no financial risk

Independent Contractor

Decides what hours to work to complete specific task

High level of control in how work is done

Usually engage for specific task

Bears the risk for making profit/loss on each task.

Indicator

Superannuation

Tools and Equipment

Tax

Method of Payment

Leave

Employee

Entitled to have super contributions paid

Provided by the employer, or tool allowance provided.

Income tax deducted by employer

Paid regularly, e.g. fortnightly, monthly

Entitled to receive paid leave or loading in lieu of leave (casuals)

Independent Contractor

Pays their own super

Use their own tools and equipment

Pays their own GST and tax (NB: 80% Rule)

Has ABN and submits an invoice when work is completed

No entitlement to paid leave

Shifting Obligations

Employment

BUSINESS CO

Ms. Worker

• OHS Obligations

• Extras if incorporated

• Pay Worker

• Unfair Contracts Exposure

• Be directed by Business Co

• Industrial Entitlements • Workers Compensation• Superannuation

• Unfair Dismissal Exposure

Direct Independent ContractingDirect Employment

• Liability for work

• Tax Administration

• Perform Work for Business Co• Contract Obligations

• Contract Obligations• Contract Obligations

• Pay Worker

FWA Sham Contracting Provisions

S357 - Misrepresenting employment as independent

contracting arrangement

S358 - Dismissing to engage as independent contractor:

• Is the employee doing the same or substantially the same work?

S359 - Misrepresentation to engage as independent contractor:

Making a false statement to induce employer to work under an

independent contracting arrangement.

• WORKERS COMPENSATION

• SUPERANNUATION

• PAYROLL TAX

• SHAM CONTRACTING - $33,000 per contraventionPENALTIES

• PAYROLL TAX

• SUPERANNUATIONUNANTICIPATEDLIABILITY

• SHAM CONTRACTING FW PROVISIONS

PERSONAL LIABILITY

RISKS

• Unanticipated liability

• Exposure to employee remedies e.g. unfair dismissal

• Increased vicarious liability

• Sham Contracting Provisions

COMMON LAW

• UNFAIR CONTRACTCOMPENSATION OR UNANTICIPATED

COSTS

• WORKERS COMPENSATION

PREMIUM EXPOSURE

RISKS

Introducing enableHR - AFG• Partnered with AFG to meet

the new HR requirements under NCCP

• NCCP compliant HR system

• Helps manage contractors and employees under NCCP and the Fair Work Act 2009

• Supports legitimacy of employment or contractor relationship

• www.enablehr.com.au/afg

Business Size* Annual Fee(excl GST)

1 – 10 $495

11 - 24 $950

25 - 50 $1,950

*Includes employees and contractors

Introducing enableHR - AFGMORE INFORMATION: www.enablehr.com.au/afg

(02) 9922 5188

PURCHASE: Click on “SIGN UP” on AFG Homppage

COST AGAIN: $495 (1–10), $950 (11-25), $1,950 (26-50)

“The introduction of the NCCP and the Fair Work Act is frustrating due to the distraction it causes to our core business.

enableHR, in conjunction with AFG, has taken the burden off our hands through the implementation of a cost efficient, time efficient, simple to use application

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Simon Orbell – Smart Move