How to Avoid Sham Contracting as a Business

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Table of Contents

• What Makes Sham Contracting Illegal?
• What Should You Do as an Employer?
• Conduct to Avoid
• Key Takeaways
• Frequently Asked Questions

The law treats employees and contractors differently, so employers must meet their legal obligations when engaging their workers. A ‘sham contract‘ describes the practice when an employer passes off an employment relationship as a contractor arrangement. Sham contracting can arise when:

• the employment relationship ends, and the contractor believes the employer owes them entitlements; or
• the worker believes they are an employee and wants to receive entitlements.

As a business owner, you should understand the difference between contractors and employees and your risks in establishing a sham relationship. This article will take you through how to avoid sham contracting as an employer.

What Makes Sham Contracting Illegal?

An employer will face penalties under the Fair Work Act (FWA) if they attempt to:

• misrepresent an employment relationship as an independent contracting arrangement; or
• attempt to influence an employee to become an independent contractor.

An employee’s status attracts certain rights and entitlements such as superannuation, leave and workers’ compensation. Hence, requiring a worker to enter into an independent contractor arrangement rather than an employment contract denies certain employee rights.

What Should You Do as an Employer?

You can take some practical steps to comply with your workplace obligations. 

Conduct Research 

You should research the differences between employees and contractors. Many employers automatically assume contractors will suit their business model. However, this is not always the case and depends on the industry in which you operate. An employment relationship may be better if you prefer control over workers’ conduct and performance.

Confirm That the Contractor is Aware of Their Working Relationship

Ensure that your worker understands the difference between a contractor and an employee and the nature of the contract they have entered into. One way to do this is to provide contractors with the option to negotiate their contracts.

Use the Right Contracts

Having written contracts in place is crucial as providing the correct information to your workers about their employment status. The written agreement between you and your workers will ultimately determine the nature of your relationship. As such, you must have well-drafted contracts in place confirming that the independent contractor is:

• running an independent enterprise; and
• maintaining control over their work.

Conduct to Avoid

You should avoid several behaviours when hiring staff to avoid being caught up in sham contracting. For example, you should never threaten to dismiss an employee to engage them as an independent contractor instead of an employee. This will likely result in action from the Fair Work Ombudsman and may constitute a sham contract.

Employment Essentials Factsheet

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Key Takeaways

A ‘sham contract‘ describes the practice where an employer passes off an employment relationship as a contractor arrangement. Engaging in sham contracting may result in severe penalties, so avoiding it is in your best interest. To avoid sham contracting, you should:

• research and confirm that your contractors know their working relationship;
• confirm that your contractors are aware of their working relationship;
• have well-drafted contracts;
• bargain and negotiate your agreements; and
• never force your employees into independent contractor relationships.

If you need assistance understanding sham contracting, our experienced employment lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions