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Sham Contracting

Sham Contracting

IR Deep Dive: The “Closing Loopholes” Bill & New “Sham Contracting” Amendments

On 4 September 2023, the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 was introduced into Parliament as the “third tranche” of sweeping changes to the Fair Work Act 2009 (Cth) (FW Act). See our articles for background relating to tranches one, and two.

The latest “tranche” proposes new changes to “sham contracts” including a stricter “defence” to these arrangements and harsher penalties for businesses who engage workers under “sham” contracts. Sham contracting is something employers need to be familiar with to avoid risking significant financial penalties and reputational harm.

So, what is “sham” contracting?

Sham contracting occurs when an employer misrepresents or attempts to “disguise” an employee relationship as a contractor relationship, resulting in employees wrongly classified as contractors.

Doing so has the effect of limiting worker access to:

  • employment protections and entitlements;
  • minimum or award wages and leave entitlements;
  • superannuation benefits; and
  • other protections and entitlements benefited by employees.

The new “Closing Loopholes” Bill proposes to:

  • continue to prohibit the misrepresentation of an employee as a contractor;
  • change and restrict the scope of the “current” employer defence to a “sham contracting” claim;
  • prohibit unreasonable misclassification of casual employees;
  • prohibit the dismissal of a permanent employee in order to engage them as casual; and/or
  • prohibit employers from misrepresenting a role in order to engage them as a casual.

How does the Bill change the existing “defence” to a sham contracting arrangement?

The Bill proposes to change the defence from a test of ‘recklessness’ to one of ‘reasonableness’.

This is intended to address perceived deficiencies in the current defence which makes it “too easy” for an employer to establish that they did not know the “true nature” of an engagement and did not act recklessly when making a misrepresentation.

What does the new “reasonableness” test mean in practice?

The ‘reasonableness test’ acts as a defence where:

  • the employer “reasonably believed” that the contract was a contract for services; and
  • the burden of proof would rest with the party who made the representation, usually the employer.

How do Courts determine whether an employee is a “contractor” or “employee”?

The Courts apply a multi-factorial test to determine if a worker is a contractor or employee based on employment-indicators:

  • Control – employees generally have limited control or say in the work they perform.
  • Finances – employees have their employer pay superannuation, taxation, and insurance.
  • Leave – employees will have certain types of paid leave like annual, personal, and long-service leave.
  • Tools and equipment – employees will be provided with most tools and equipment by their employer.
  • Uniform – employees may be required to wear a uniform.

These indicators are considered and a view formed thereafter as to the “true” nature of a worker engagement. A well-structured engagement should clearly deal with the above “indicators” to avoid uncertainty in the event of a future dispute.

What steps can employers take to ensure their worker engagements are properly structured?

The most common issues we see with clients and their employment models involve:

  1. Poor worker set-up: A worker being incorrectly classified or structured from the outset of their engagement;
  2. Poor ongoing governance: A lack of ongoing governance checks to ensure that the nature of a worker’s relationship doesn’t “change” over time and “become” something it was not intended to be.

Critical to managing this worker-category risk is ensuring businesses seek and obtain robust advice to structure and monitor an engagement properly, or rectify the situation in the event of a mistake.

New penalties – beware!

New civil remedy provisions are proposed in relation to engaging in sham casual arrangements with a maximum penalty of 300 units – or roughly $93,900 based on current penalty unit rates.

If an employer is found to have engaged in sham contracting but successfully makes out the defence:

  • the employer would not be liable to a civil penalty for a contravention relating to the “sham contract”;
  • however, they may still be liable for other civil contraventions in relation to the misclassification – such as for not paying the correct entitlements as a result of the misclassification.

Either way businesses should ensure they take care when structuring their employment models to avoid being “on the hook” for a breach and liable to a civil penalty and/or to backpay the unpaid entitlements.

How can Nellers HR help?

Nellers are all too aware of the issues that can face businesses with improperly structured engagements and can assist with a range of services including:

  • set up and structuring of employment and contracting arrangements;
  • development of employment contracts and/or services agreements;
  • audit and advice regarding existing engagements;
  • training and implementation support; and
  • support with disputes or issues in the event of a claim.

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