Litigation to date (2006 to April 2011)
ICA is committed to monitoring sham contract prosecutions and reporting and recording these on our website.
ICA has referred a number of people to the Fair Work Ombudsman where they have had concerns regarding their contracts.
ICA is aware that the Fair Work Ombudsman and the Australian Building and Construction Commission have undertaken a number of investigations into alleged independent contractor arrangements where complaints have been received.
The Workforce Ombudsman launched two prosecutions in early 2009, but they did not appear to proceed. The CFMEU conducted a prosecution in October 2009, with a final determination on 8 October 2009 which found that no sham existed (see discussion below).
There have now been about five successful prosecutions to our knowledge. Here are three of the cases:
- Late in 2009 a Sydney real estate agent was fined.
- A small finance company (Centennial, now in liquidation) was fined in November 2010. We have summarized the case here and the court decision is here. Update June 2011: In a follow-up court determination, the director of the company and the human resources manager have been personally fined for engaging in the sham Here’s our summary and the court decision.
- April 2011: Canberra construction company: The case is summarized below with links.
First successful sham contracting prosecution in the construction sector, Canberra (April 2011)
A small construction firm and its two directors have been fined for conducting a sham contract. Here’s the court decision.
Summary
- $10,000 fine on the company
- $2000 fine on each director
The investigation and prosecution by the ABCC began under the previous Commissioner, John Lloyd.
The facts are that the two directors held a meeting with employees telling them they could be set up as independent contractors and save tax as a result. The directors said they would increase the workers’ pay but not pay workers’ compensation premiums on them, or superannuation and long service leave. Letters were further sent to the workers restating the above. However there was no evidence:
- of statutory obligations not being paid.
- of non payment of PAYG tax
- that that workers were paid less than award rates
This was the first and only breach by the directors. There was not a pattern of behaviour by the directors in this respect. The directors cooperated with the ABCC in the investigation.
The court found that the directors had made misrepresentation to the workers who were and remained employees, not independent contractors. The directors admitted to breaching the sham contracting provisions of the Fair Work Act.
ICA comment
All businesses must be careful about how they engage independent contractors. In this instance, telling the workers that superannuation and workers’ compensation were not payable and that they would receive extra tax deductions by being an independent contractor were false. These statements themselves were a misrepresentation. Superannuation and workers’ compensation are still payable in many/most instances where the worker is an individual. These laws take in certain types of contractors. Further the Personal Services Income tax laws ensure that individuals, either as an employee or independent contractor receive only those tax deductions for expenses genuinely incurred in earning income.
The directors of the company tried to turn the employees into independent contractors when the workers clearly remained employees. They had intent to misrepresent and consequently had created a sham.
Summary of the Centennial case (November 2010)
Centennial was a small Sydney-based finance company that found itself in difficulties. To reduce costs, the company informed its sales employees that they would become independent contractors. The forced transfer to ‘self-employment’ resulted in the sales people earning less than they had previously. Upon investigation by the court, the sales staff were found to still be employees, not independent contractors.
ICA comment: A key part of being an independent contractor is that it is something you have chosen to do. You do not ‘become’ self-employed simply because an engaging party declares that you are. The judgement in this case reflects that.
Update June 2011: In a subsequent court decision, the company director and the human resources manager have been personally fined for conducting the sham. The HR manager had argued that he was not responsible because he’d merely followed the instructions he was given by the company director. The court ruled that, in spite of this, the HR manager should have advised the director that the action of changing the employees to contractors was not valid. The change was made in an attempt to avoid paying wages, leave and superannuation entitlements.
Here’s the court decision.
Overview and commentary on first sham contract prosecution (Nubrick)
11 October 2009
For the Federal Magistrates Court’s determination (7 October), go here.
The first sham contract prosecution has had an outcome. The Federal Court has found that two ‘contractors’ were in fact employees, but that no sham existed.
The construction union says that because there was no finding of a sham contract, the federal act needs to be changed. They are wrong. In fact the court outcome proves that the sham contract provisions work.
There are major implications, however, for all businesses that seek to use independent contractors. With more than 2 million self-employed people working in Australia, there are probably not many larger businesses that do not engage independent contractors.
ABN error
The company that engaged the ‘contractors’ seemed to think that if the workers each had an Australian Business Number (ABN) that they were contractors. This has always been false. ABNs are an administrative instrument of the Australian Taxation Office used only to manage GST and BAS obligations. The ABN legislation makes it clear that the holding of an ABN by an individual is NOT an indicator, one way or the other, of whether a person is self-employed/independent contractor or an employee.
The determination of whether an individual is an employee or an independent contractor is entirely a common law test that is well established at law:
- See here for ICA’s one-page check list
- For a full understanding read ICA’s ‘swinging pendulum’ explanation.
What is a sham contract?
The Federal Court decision gave interpretation to the meaning of ‘sham contract’ under the Fair Work Act. The Court reinforced the wording in the Act that for a ‘sham’ to exist:
a) The worker/s in question must clearly be employees, not independent contractors.
b) There must have been intent to misrepresent the employees as independent contractors.
That is, if the engaging party genuinely believed the workers were self-employed and an error was made, there is no sham.
The manager at Nubrick genuinely believed that because the two workers in question had ABNs, they were independent contractors. There was no intention on behalf of the manager to deceive. An error had been made.
ICA comment on shams and the CFMEU approach
Like the CFMEU, ICA opposes sham contracts. Unlike the CFMEU, ICA supports the existing legislation because it reflects the practical realities and problems of implementing independent contracting correctly. The CFMEU appears to be of the view that the simple finding that an alleged independent contractor arrangement is in fact employment should result in an automatic sham contract outcome. ICA rejects this. Even though the difference between employment and independent contracting is totally clear at common law, applying the law in practice requires some skill, knowledge and attention to detail in managerial practice.
Even when the worker/s and the managers both agree that they have independent contracting (as appears to be the situation in this Nubrick case), a court can find differently. Sometimes the difference between the employment and independent contracting can be very clear. Sometimes there is only a fine difference. This is the point ICA makes in our explanation of the ‘swinging pendulum’ test. The outcome depends on the balance of evidence presented to a court. In reality, 100 per cent certainty as to whether a situation is employment or independent contracting is only possible through a court determination. Workers and managers of businesses must operate on their best available knowledge. It would be totally unfair to declare a manager/business guilty of a sham if they were really only guilty of a genuine error.
However, this test case also indicates that businesses and managers will have to become educated.
ICA comment: managers can’t be ignorant anymore!
As more sham contract prosecutions occur, it is likely that the courts will become increasingly intolerant of business managers who do not educate themselves on the true processes to distinguish between employment and independent contracting.
This case (Nubrick) should put to rest the very common misconception that an ABN denotes self-employment. It does not.
The other great but common falsehood in Australia is that the 80/20 rule applies. Read here why it is a great myth. It’s also a dangerous myth that could lead companies to fall foul of the sham contract provisions in the future.
A key reason for ICA’s existence is that we want people (self-employed and business managers) to be educated about what genuine independent contracting and true employment actually are, rather than be misled by the myths and falsehoods (eg, ABN and 80/20). In fact, ICA’s executive director Ken Phillips has written a book on the subject and ICA’s website is largely dedicated to this effort. However, we still see large-scale ignorance on these matters.
We believe things are moving in a direction where ignorance will no longer be an excuse. ICA firmly believes that company managers must lift their game and become fully aware of the principles that distinguish self-employment from employment. They must implement proper procedures and/or make use of systems and procedures that lock in correct managerial behaviour.
A word of warning! Simply obtaining a ‘standard form’ contract from a legal firm that allegedly creates independent contracting is not good enough. The courts always ‘look through’ the written form to find the contractual truth in the behaviours. It is the daily managerial systems and behaviours that will determine success or failure.
To understand a sham contract prosecution process, go here.