Are your contracting arrangements a sham?

The sham contracting provisions of the Fair Work Act 2009 are based on the same provisions of the Workplace Relations Act 1996, and relate to circumstances where employers try to disguise genuine employment arrangements as independent contracting arrangements.

The provisions of the Act state that an employer cannot misrepresent an existing or future employment relationship as an independent contracting arrangement or knowingly make a false statement to persuade or influence an employee to become an independent contractor.

For example, the section could apply if:

• an employer tells a future or existing employee to invoice the employer for work done;

• a future or current  employee is told to form a company or take out their own insurance;

• a future or existing employee is told to tender for work.

It is a "defence" to an allegation of breaching the sham arrangements provisions if the person can prove that they did not know that, and were not reckless as to whether, the contract was a contract of employment rather than a contract for services.

Employers need to ensure that they consider the actual nature of the relationship before the person is called an “independent contractor” even though there may be cost, taxation or control advantages to the employer in having an independent contractor arrangement. The other party may also ask for or benefit from a contractor arrangement but the onus is on the employer to correctly categorise the position.

A recent case of the use of this part of the legislation is the Australian Building and Construction Commission’s (the ABCC - the building industry regulator) allegations against a building and construction company and its two directors of breaching the Workplace Relations Act's s900(1) (now s 357 of the Fair Work Act 2009) prohibition on misrepresenting an employment relationship as an independent contracting arrangement.

The ABCC alleges the builder's relationship with the five formworkers bore all the hallmarks of employment, including regularly paying wages, super and long service leave, providing workers compensation insurance, protective clothing and tools, and directing them on how to carry out their work.

However, it claims that in June 2009 the employer called the employees into the company's head office - their accountant and insurance broker were also present - and told them they were to become independent contractors. This case is yet to be prosecuted.

In another case a manager of a companyoffered a forklift driver and a plant operator: a flat rate of $30 per hour (out of which they would have to pay tax); told them to provide an ABN and invoices for work done; and informed they would not get annual leave, sick leave or superannuation. On the job, however, they worked fixed hours, were directed when to start and finish, were provided with safety gear and tools and worked solely for the company – all indicators of employment according to the Federal Court. The Magistrate said, however, that the relevant question for the court was whether the manager "was aware at the time he engaged the person as independent contractors, that they were employees".

The evidence was that he "was not aware of the probability of the harmful consequences of his conduct but nevertheless pursued it", and therefore the s901 (2) defence applied, the Magistrate said.

Employers must be aware that when the details of the work arrangements are unclear there is a significant risk of prosecution, even if the employer acted in good faith.  An investigation, let alone a prosecution, of such a matter can be time consuming and expensive. Employers are advised to invest in advice to assist in getting the contract right to avoid expensive litigation later.

Further, an employer cannot dismiss or threaten to dismiss an employee to re-engage them as an independent contractor or knowingly make a false statement to persuade or influence an employee to become an independent contractor.

If an employer dismisses or threatens to dismiss an employee to re-engage them as an independent contractor, the Fair Work Ombudsman can apply to the courts to: stop the dismissal from happening; order the employer to give the employee their job back; or have the employer compensate the employee.

There are significant penalties that apply if the provisions are breached.

The both the Australian Building and Construction Commissioner (ABCC) and the Fair Work Ombudsman may prosecute an employer if they find the employer is involved in sham contracting.

Under the Fair Work Act 2009, the courts may order the employer to pay a penalty of up to $33,000 per breach for a body corporate or $6,600 for an individual.

This means, if the employer is involved in more than 1 sham contracting arrangement, the employer or individual may be penalised for each arrangement.

You can find out whether your contractor arrangements are compliant by attending Business SA’s forum on this issue.

For more information visit

Adelaide Office

Level 1
136 Greenhill Road Unley
South Australia 5061

P 08 8300 0000
F 08 8300 0001



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