Shams in the construction industry

It is common for builders and other participants in the construction industry to utilise contractors to carry out specific trade work such as concreting, plastering, bricklaying and plumbing.

Business operators, however, need to be cautious when ‘hiring’ skilled or other labour, to ensure that they are not in breach of provisions of the Fair Work Act 2009 (the FWA’) which prohibits a person from misrepresenting ‘employment’ as ‘independent contracting’, commonly known as ‘sham contracting’.

These arrangements are common in the construction industry and are illegal.

It is important for business operators to understand the difference between an independent contractor and an employee.

Misrepresenting employment as independent contracting

Section 357 of the FWA states that

              ‘…a person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment                               under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform,                     work as an independent contractor.’

Essentially, an employer is prohibited from offering a person a role as an independent contractor when the position is effectively a contract of employment and should create an employer / employee relationship between the parties.  

In practice, the employer will insist that the ‘contractor’ obtaining an Australian Business Number (ABN) and creating his / her own business before commencing work. The worker is responsible for paying his or her own taxes and insurances.

The worker is treated as an independent contractor and the employer circumvents the obligations that would normally arise from an employment relationship resulting in the worker foregoing access to employment entitlements such as payment for annual and sick leave, long service leave, compulsory superannuation contributions and protection from unfair dismissal or termination of employment.

For contractors who are genuinely running a business as a profit-making enterprise, this is not a problem. But, in the case of a sham contract, whilst the worker may earn a higher hourly rate, they must pay their own tax, insurance and superannuation.

Sham contracts are illegal

It is illegal to inform an employee that he or she is an independent contractor or to dismiss an employee or threaten to dismiss an employee to ‘re-engage’ them in predominantly the same work as they performed whilst they were employed.

Similarly, a person must not induce a former employee to carry out the same type of work as when they were employed, under the guise of an independent contractor.

Businesses entering into sham contracts risk significant civil penalties and potential claims for back-pay of employee entitlements, such as annual leave payments, sick leave and superannuation contributions.

Example of a sham contract

Grant is a labourer and works five days per week, usually ten-hour days, exclusively for a particular plastering company. He has worked exclusively for that company for approximately twelve months and is given start and finish times and location details for each job by the Director of the company. The plastering company provides branded shirts for Grant to wear and he uses the company’s tools.

Grant was told at the beginning of the arrangement that he would need to obtain an ABN and ‘take care of his own taxes and insurances’. He is paid $30 per hour based upon an ‘invoice’ he gives the company each Friday but is not paid for days when he is sick or over the Christmas/New Year period.

The difference between an employee and an independent contractor

The distinction between an employee and independent contractor is not always easy to determine. Generally, a Court will look behind the label given to the arrangement, to identify the factual substance of the relationship.

Primarily, an employment relationship is an exchange of labour (time, skill and effort) for remuneration – the employee serves the employer as opposed to carrying on a business in his or her own right.

If the worker is acting as an entrepreneur who owns and operates an enterprise and represents its own business, then it is more likely that the worker is an independent contractor.

The entirety of the relationship is analysed which might consider the following factors:

• the degree of control the employer has over the worker;

• whether the worker works exclusively for the employer;

• the provision of a uniform, business cards, etc. from the employer;

• whether the worker undertakes work personally or is free to delegate to others;

• the location of the work;

• the method of payment for the work performed – whether at an hourly rate or on completion of a specific project;

• the responsibility for acquisition of materials and maintenance of equipment;

• the creation of goodwill of saleable assets through the work performed;

• the allocation of risk and profit associated with the work;

• the degree of integration the worker has with the entity for which it works;

• the existence of leave, taxation, superannuation payments, etc.

Why do businesses use sham contracts?

A sham contract may result from simple ignorance on the part of the business owner or a desire to minimise costs. A worker may even indicate that he or she is ‘happy’ with the arrangement.

Sham contract may be prevalent during the start-up phase of a new business, where cashflow is limited and the future success of the enterprise is unknown. Conversely, businesses may have been running sham contracts for some time.

The temptation to use ‘contractors’ instead of employing staff usually stems from a desire to circumvent the would-be employer from the financial and other responsibilities that arise from an employment relationship. The employer need not comply with nationally-recognised employment conditions, annual leave, sick leave, workers’ compensation or termination processes.

Conclusion

If you are considering engaging workers for your next building project, you should think carefully about the arrangements to determine whether your workers are truly independent contractors or are they your employees.

The implications of not considering these issues could lead to significant costs.