How to avoid a sham contracting claim

By Vivian Michael | Employment

How to avoid a sham contracting claim

Photo by Emma Matthews on Unsplash

Updated: 30 September 2019

If you are thinking about hiring a contractor, read on for useful tips to avoid a sham contracting claim against your business. 

So, what exactly is sham contracting? We’ll look at this first.

Sham contracting meaning

Sham contracting occurs when an employer calls what should be an employer-employee relationship, a principal-contractor relationship. The usual reason is so the employer can avoid paying employee entitlements like annual leave and superannuation. 

Under the Fair Work Act 2009 (Cth), an employer cannot: 

  • Misrepresent an employment relationship or a proposed employment arrangement as a contracting arrangement; or
  • Dismiss or threaten to dismiss an employee for the purpose of rehiring them as a contractor; or
  • Make knowingly false statements to persuade or influence the employee to become a contractor.

Importantly, there are penalties for sham contracting so don’t do it. 

So how do you know if you should hire an employee or a contractor?

There are differences.

And, if you are in doubt, you should always get advice. 

Contractor vs employee

There are certain differences between employees and contractors and its important to know these.

For example, contractors have more autonomy about how the work is completed, they may set their own work hours and have insurance to cover their work.

On the other hand, employees are given more direction about when and how work is completed, they don’t need their own insurance and they are paid entitlements like annual leave and sick leave. You can read more about the differences here

From contractor to employee

And in some cases, its appropriate to move your workers, with their agreement, from a principal-contractor relationship to an employer-employee relationship. 

For example, if you are finding that you are giving the contractor lots of work direction, you need them to be working at your business at certain times and your project got extended out so they are spending most of their time at your business you may want to consider an employee agreement.

You can read more about when to make the switch from contractor to employee agreement right here

I wish you every success in your ventures!


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About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to entrepreneurs launching in Australia that would otherwise DIY, rely on legacy contracts or go without.

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