Three tips to help your business avoid sham contracting

Businesses are being warned to review their employment arrangements with contractors to ensure they’re not in breach of legal obligations, or risk facing court for sham contracting.

Holding Redlich partner Alistair Salmon told SmartCompany there have been no cases, in memory, where courts have found in favour of the employer in a sham contracting case.

“There have been sham contracting cases where the employer was fined more than $250,000, when you consider the penalty against the company and individuals,” he says.

“Employers need to seek advice to ensure they haven’t misclassified employees as contractors.”

In July last year a New South Wales transport business and its operators were fined a record-breaking $286,704 for sham contracting.

The Newcastle-based company Happy Cabby and its operator and sole director, Graeme Paff, were fined $238,920 and $47,784 respectively for underpaying seven workers $26,082.

To avoid attracting such substantial penalties, Salmon gave SmartCompany three tips to protect your business from sham contracting charges.

1. Review your contractors and employees

Salmon says businesses currently employing contractors need to assess whether or not this classification is correct.

“They need to consider if they really are contractors, of if these workers would normally be covered by a modern award,” he says.

“If there are independent contractors, consider on what basis they are true contractors. The business should then seek advice to ensure this classification is correct.”

Salmon says businesses at the hiring stage must follow the same process in order to ensure workers are contractors, not employees.

2. Does your employee work for themselves?

The courts take into account a number of considerations when determining if someone is an employee or an independent contractor, but it essentially comes down to whether or not the person is self-employed.

“Workers may well have attributes of both,” Salmon says.

“The courts use a number of indicia to make a determination; it’s not one point or another. But the essential premise is the consideration of whether or not the worker in the business works for themselves.”

Salmon says jobs such as being a retail assistant of a supermarket trolley collector clearly mean the worker is an employee.

“The guiding light question is whether or not they’re in business for themselves,” he says.

3. To avoid legal action, seek advice

Salmon says if the business owner seeks legal advice regarding whether or not someone is a contractor, this can offer a legal defence.

“One of the provisions is that the employer wasn’t reckless in classifying the worker, and if you’ve sought legal advice, you haven’t been reckless,” he says.

“Seeking advice is kind of like taking out an insurance policy.”

Salmon says for small businesses where cash flow is tight, it’s worth considering the financial consequences of misclassifying an employee before deciding not to seek advice.

“It doesn’t cost you that much in the scheme of things to get advice, and the amount you’ll save compared to if you get it wrong far outweighs the costs,” he says.