Businesses are increasingly getting caught out on sham contracting arrangements as the Fair Work Ombudsman cracks down to avoid the government footing a $2.4 billion, a year bill in unpaid taxes.

EI Legal offers these tips on how to avoid sham contracting arrangements...

Sham contracting is where an employment relationship between a worker and employer is misrepresented as an independent contracting arrangement. Some employers do this to avoid paying entitlements such as leave, superannuation and minimum rates of pay.

What employers cannot do:

• 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.

The Fair Work Act 2009 provides serious penalties for contraventions of these provisions. The Fair Work Ombudsman has been targeting particular industries including hair and beauty, cleaning, construction and call centres.

Patricia Ryan, practise manager at EI Legal said, “The concern is that some businesses may be engaging in sham contracting to falsely lower labour costs and to avoid paying annual leave, holiday pay, superannuation and pay as you go (PAYG) withholdings. This means that they are incorrectly classifying their employees as contractors.

“Sham contracting is a serious offence and can expose a business owner and a company to up $33,000 in fines. Employers must seek professional advice if unsure of any employment arrangement.”

Tips to avoid sham contracting arrangements:

1. Review all employment arrangements to ensure any independent contractor agreement is a genuine arrangement. An ABN or invoice for a payment does not make someone an independent contractor.
2. Get educated on the law. Employers need to be aware of the Independent Contractors Act, the Fair Work Act and the common law.  The correct characterisation of labour is also relevant for worker’s compensation, superannuation, income tax and payroll tax.
3. Review case studies to realise the extent of the issue. It is important that employers make themselves aware of scenarios where businesses have been caught out to understand the extremities the issue can cause. The Fair Work Ombudsman has created a tool to assist you in understanding whether an independent contractor is genuine.
4. Seek professional advice. If you are unsure of any employment arrangement in your business seek professional help immediately