What is sham contracting?

Sham contracting is a practice where an employer misrepresents a worker as an independent contractor instead of an employee. This practice is illegal under the Fair Work Act.

The Fair Work Act defines an employee as a person who performs work for another person in return for payment, and the employer has control over the work performed, how it is done, and when it is done. On the other hand, an independent contractor is a person who operates their own business and provides services to other businesses or individuals.

The distinction between an employee and an independent contractor is essential as employees are entitled to certain rights and protections under the Fair Work Act, such as minimum wages, superannuation, paid leave, and other entitlements. In contrast, independent contractors are not entitled to these protections and are responsible for paying their own taxes and providing their own equipment.

Sham contracting occurs when an employer intentionally misrepresents an employee as an independent contractor to avoid providing entitlements and protections under the Fair Work Act. This practice is illegal and can result in significant penalties for employers, including fines and legal action.  In addition, employees who have been incorrectly classified as independent contractors can seek remedies through the Fair Work Ombudsman.

To avoid engaging in sham contracting, employers should carefully consider the nature of the working relationship and ensure that the worker is correctly classified as either an employee or an independent contractor. This can be determined by assessing the level of control that the employer has over the work performed, the level of integration of the worker into the business, and the nature of the work performed.

Sham contracting is a serious issue that can result in significant legal and financial consequences for employers. Employers should ensure that they comply with the Fair Work Act and correctly classify their workers.

If you need any advice and need help, please reach out at hello@hrdynamics.com.au or 1800 877 747