Sham Contracting – What Is It? And How Can You Avoid it?

The term “sham contracting” usually refers to situations where an employer, often inadvertently, misrepresents an employee as a contractor.

The courts can require an employer to pay employee entitlements such as overtime, allowances and superannuation to the worker if sham contracting is found to have occurred. The employer may also be required to pay significant penalties.

What is the difference between a contractor and an employee?

A variety of indicators are considered when determining whether a worker is an employee or a contractor.

For example, the following are indicators of an employment relationship:

• the employer/principal exercises a lot of control over the worker
• the worker is not required to provide his or her own tools and equipment
• the worker generally works standard or set hours
• the workers is paid regularly (e.g. weekly or fortnightly)
• the worker bears no financial risk for making a profit or loss on each task
• the worker is entitled to leave.

If any or all of the above indicators apply to the working arrangement, then the worker may be deemed to be an employee – even if they are called a “contractor”.

How can you avoid sham contracting?

To avoid sham contracting, it is important for workers to be correctly classified as either an employee or a contractor. Whether a worker is an employee or a contractor will depend on the circumstances of the engagement.

Contact one of our lawyers for more advice on this topic.