October 5, 2019

How to avoid a sham contracting claim

How to avoid a sham contracting claim

Updated: 2 December 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.

Why would an employer do this?

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 it's 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 set times and your project got extended out so they are spending most of their time at your business, in these cases 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!


About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, Vivian advises Australia's top entrepreneurs on business and employment matters. Clients benefit from Vivian's commercially focussed and pragmatic legal advice, business experience, and commitment to deliver the best quality business legal services to her clients.

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