Sham Contracting

Sham Contracting

Sham contracting is essentially misrepresenting an employee as an independent contractor.  You will engage in sham contracting if you employ, or propose to employ, someone and you misrepresent an employment contract as an independent contractor agreement.  You will also engage in sham contracting if you dismiss an employee and engage them as an independent contractor to do much the same work.

However, it is not sham contracting on the basis of misrepresentation if:

1. You did not know the actual or proposed contract was an employment contract rather than a contactor agreement; and
2. You were not reckless as to whether the actual or proposed contract was an employment contract rather than a contractor agreement.

Your ability to successfully defend a sham contracting claim will depend on your ability to prove the above.  This was the subject of a recent Federal Circuit Court of Australia decision (Director of the Fair Work Building Industry Inspectorate v Bavco Pty Ltd & Ors (No.2) (2014)) in which the state of mind of the manager responsible for engaging employees as contractors was relevant.

In this case, although the manager did know that there was a distinction between engaging a worker as an independent contractor or an employee, she struggled to make the determination as to whether the workers had been correctly engaged as contractors.

Because the manager was found not to have known that the workers were engaged under employment contracts and not contractor agreements, the first element of the defence was satisfied.   She did not realise that the workers should have been engaged as employees rather than contractors.

The company was then audited by the Australian Building and Construction Commission (ABCC) which issued the company a letter to the effect that the company had not breached the sham contracting provisions of the FWA.  Despite this, the manager converted the contractors to employees to ensure compliance with the Act.

Although the manager was found, on the basis of the ABCC letter, to have reasonably believed that the company was not engaging in sham contracting, she also took steps to ensure that all workers were engaged under employment contracts.  This led the Court to find that she was not reckless or indifferent to whether the workers had been properly engaged.

As the company had been able to satisfy both elements of the defence, they were found not to have engaged in sham contracting.

The upshot of this is that when engaging contractors, you should firstly satisfy yourself that it is proper to engage them as such and not as employees.  If you reach that conclusion, you should ensure that you have evidence of having considered the correct way to engage the relevant worker and your basis for believing that the arrangement represents a true contracting relationship.