Contractor or Casual? Avoiding Sham Contracting
June 30, 2016 | By Christine Howitz, Vitil
What Is Sham Contracting?
Sham, what does it mean exactly? According to the Oxford Dictionary; it is something that is not what it purports to be, a fraud or hoax. Sounds serious if we are talking about employment!
We've had a few calls from our HR clients recently who have been unknowingly shamming employees, and to be honest, the lines are a bit blurry so we don't blame them for getting it wrong.
According to Employee Relations, The Fairwork Ombudsman, there are a number of factors which may contribute to determining what constitutes an employee and an independent contractor. So let's try and remove the grey and break it down simply.
A sham contracting arrangement occurs where an employer tries to mask an employment relationship as an independent contracting agreement, usually done so that companies can avoid the responsibility for employee entitlements ie super, payroll tax, leave entitlements etc. This is dodgy.
To Understand The Differences, First Look At What An Employee Is
- Performs services under the management and control of their employer on an ongoing basis.
- Works standard or set hours (bear in mind, casual employees hours generally vary).
- Has an ongoing expectation of work (unless employee is employed for a specified fixed term or specific task).
- Receives superannuation entitlements from their employer, to employees nominated superannuation fund.
- Employer generally would provide tools and equipment for the employee to conduct their work, a tool allowance may also be paid by the employer.
- Has income tax deducted by their employer.
- Bears no financial risk – that's all yours as the employer!
- Are paid regularly (for example, weekly/fortnightly/monthly).
- Are entitled to receive paid leave (for example, annual leave, personal / carers' leave, long service leave). Casual employees may receive a loading in lieu of leave entitlements.
- Is covered by employer's insurance for injuries sustained in the workplace.
Seems pretty black and white so far…so let's move onto Contractors:
- A contractor has control of the hours they work as agreed to get the job done and a level of control in so far as how the job is performed. They can also refuse to provide services if it is outside the scope that has been agreed to.
- They are generally engaged to provide services for a specific task or period so therefore the expectation of ongoing work is removed.
- Can do work for others at the same time they are working for you.
- Pay their own superannuation, which brings us to our first grey area. There are circumstances when an independent contractor may be entitled to be paid superannuation contributions. "When might that be?" I hear you ask.
Basically if your contractor has an "individual agreement" the company will pay the superannuation. If your contractor has a "company agreement" the contractor will pay their own superannuation.
An individual agreement means that your contractor is registered with the ATO as an entity trading as a business and as such, will have an ABN (Australian Business Number).
A company agreement means your contractor has a company registered with ASIC (Australian Securities and Investments Commission) and will have an ACN (Australian Company Number) in addition to an ABN.
- Uses their own tools and equipment (NB. alternative arrangements may be made within a contract for services).
- Generally, have their own insurance policy covering any injuries sustained while on the job – additional advice here *Ask your contractor to provide documentation, seriously, you will be glad you read this bit*.
- Pays their own tax and GST to the Australian Taxation Office.
- Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
- Does not receive paid leave.
Further, the Fair Work Act states:
- As an employer you cannot misrepresent a human resource employment relationship as an independent contracting agreement; and
- You cannot make a knowingly false statement to coerce or influence an employee to become an independent contractor.
So in summary, sham contracting is bad and it's illegal. You can be fined up to $54,000 if found guilty of doing it and that's pretty expensive, so best to avoid.
If you work in the building and construction industry then beware the ATO are losing millions every year in tax income through sham independent contracting arrangements.
If you need help navigating this grey and muddy area of contractors then call Vitil Human Resource Consultants. We can assist you with independent contractor agreements and advice on whether or not your current business arrangement may be considered a sham.
Vitil Human Resource Consultants are HR professionals who have experience of a vast array of different situations. Our team of human resources professionals, offer flexible, reliable and affordable outsourced human resource support, where your team is the key focus. By outsourcing HR to an expert in Human Resource Services, our experienced HR professionals can objectively assess your environment and your human resources capital needs, to further develop your businesses performance.