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Sham contracting in the building and construction industry

Find out what makes a contract a 'sham' contract and the difference between employees and contractors

Independent contractors have different obligations and rights to employees because they are running their own business. The distinction between an employee and independent contractor is based on many factors. No single factor determines whether a person is an employee or contractor. For example, having an Australian Business Number (ABN) or issuing invoices doesn’t automatically make you an independent contractor.

What is sham contracting?

A sham contracting arrangement is when an employer disguises an employment relationship, either recklessly or intentionally, as a contracting arrangement. This might be done to avoid certain taxes or shirk responsibility for employee entitlements such as minimum wages, superannuation, workers' compensation and leave.

Under the sham contracting provisions of the Fair Work Act 2009, an employer cannot:

  • knowingly or recklessly misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement
  • dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor
  • make a knowingly false statement to persuade or influence an employee to become an independent contractor

Sham contracting is illegal

Sham contracting can be done knowingly or recklessly by an employer. It’s illegal to:

  • claim an employee is an independent contractor if they are not
  • say something false to convince an employee to become an independent contractor
  • dismiss or threaten to dismiss an employee if they don’t become an independent contractor dismiss an employee and then hire them as an independent contractor to do the same work

The Fair Work Act 2009 provides serious penalties for failing to comply with these provisions.

Employee or independent contractor?

No single factor determines whether a person is an employee or contractor. When determining the status of a person's employment, courts and tribunals will look at each case and make a decision based on the relationship between the parties.

There are some common factors that may contribute to determining whether a person is an employee or independent contractor:

Indicator Employee Independent contractor
Degree of control over how work is performed Performs work, under the direction and control of their employer, on an ongoing basis Has a high level of control in how the work is done
Hours of work Generally works standard or set hours (note: a casual employee's hours may vary from week to week) Under agreement, decides what hours to work to complete the specific task
Expectation of work Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period) Usually engaged for a specific task
Risk Bears no financial risk (this is the responsibility of their employer) Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. Contractors generally have their own insurance policy
Superannuation Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions)
Tools and equipment Tools and equipment are generally provided by the employer, or a tool allowance is provided Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services)
Tax Has income tax deducted by their employer Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project
Method of payment Paid regularly (for example, weekly/fortnightly/monthly) Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project
Leave Entitled to receive paid leave (for example, annual leave, personal/carers' leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees Does not receive paid leave

(Source: Fair Work Ombudsman Fact Sheet - Independent contractors and employees, August 2018)

Further information

Individuals who think they might be in a sham contracting arrangement can contact the Fair Work Ombudsman on 13 13 94.

Reviewed 19 November 2019

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