💡Key Insights
- Sham contracting occurs when a worker is treated as an independent contractor but legally functions as an employee, exposing businesses to penalties and back payments under Australian workplace law.
- To avoid sham contracts, the independent contractor arrangement must reflect genuine independence, including control over work, ability to subcontract, provision of tools and responsibility for tax and insurance.
- Written contracts alone are not sufficient because regulators assess the real working relationship based on day to day conduct rather than job titles or labels.
- Regularly reviewing contractor arrangements and aligning them with legal tests helps businesses reduce compliance risk and ensures independent contractors are engaged lawfully.
It’s essential that employers correctly classify their workers and employees, to ensure that their workers receive the obligations they are owed. A sham contract is a method of avoiding these obligations. The Contractor Agreement document provides a template to ensure you meet the requirements under law. Below, we break down different tactics to ensure that independent contractors can avoid sham contracts.
What is a sham contract?
A sham contract is where an employer outlines their employment relationship as a contract arrangement, rather than an employee relationship. This often becomes an issue when the worker wishes to receive employee entitlements.
Why is a sham contract illegal?
Under the Fair Work Act 2009 (Cth), an employer is liable to penalties if they disguise an employment relationship as something else. Even if an independent contractor signs an agreement, they may still be considered an employee.
Certain exclusive rights are available to employees. These include:
- Annual leave.
- Sick days.
- Superannuation.
- Workers compensation.
To establish a sham contract, the employer either purposefully creates the contract to avoid their legal obligations, or they’re careless when determining the status of the worker.
How to avoid sham contracts
There are many steps you may take as an independent contractor to ensure you’re not locked into a sham contract. Below, we break down several methods to ensure you receive the rights you’re owed.
Conduct research
The first step to avoiding a sham contract, is to know what it is. You need to understand what rights you’ll be owed, dependent on the job you’re doing. An employee relationship and contractor relationship are completely different, and as such, different rights and obligations are owed.
Understand what you’re entitled to, and make sure you express this to your employer when negotiating a contract.
Negotiate
As an independent contractor, you have to look out for yourself – you don’t have a boss to do this for you. Accordingly, when negotiating a contract, you need to ensure that you’re receiving the best contract for yourself.
Even if you’re entering a contractor relationship, outline that you’re requesting certain rights and have these written in the contract. That way, even if you’re labelled in a contract relationship, you can negotiate certain rights and entitlements.
Seek professional help
As an independent contractor, you may not have all the skills necessary to understand what’s a sham contract, and what isn’t. Furthermore, you may not be aware of the available rights.
Accordingly, it is recommended that you meet with an employment lawyer to discuss your concerns. They may ensure that the contracts are legitimate, and that you receive the rights you’re owed.
Final thoughts
In conclusion, sham contracts are a form of ensuring that independent contractor’s do not receive all the rights they’re owed. Accordingly, it’s necessary to follow the recommended steps to ensure you’re protected. An employment lawyer may be able to assist if you have further enquiries.
