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Published: 26 November 2015
Author: Ryan Carlisle Thomas

Sham contracts are illegal: Your working status and rights

Employee or independent contractor?

Recent alleged scams implicating Pizza Hut and Myer have seen workers speaking out against potential sham contract arrangements and the underpayment of wages. [1]

The issue of sham contracting is also a key term of reference of the Victorian Inquiry into Labour Hire and Insecure Work, which is now collecting stories and evidence.

What is sham contracting?

Many workers enjoy working as an independent contractor, contractor or sub-contractor. Such arrangements can offer them the flexibility to negotiate their own terms and conditions of work, and allow them to work for more than one employer at a time.

However, workers ought to be careful that their employer is not misrepresenting the true legal nature of their employment. Some employers knowingly do this to avoid workplace obligations and entitlements.

The Fair Work Act prohibits an employer from misrepresenting an employee as an independent contractor or to coerce them into becoming an independent contractor when in fact they are not. This practice is called sham contracting. Any employer who is found guilty of the practice can face large financial penalties. In certain circumstances these penalties can be paid directly to the workers who have been shammed.

How do I tell?

The distinction between independent contractors and employees is often a fine one. It is important for workers to look beyond the surface of their employment relationship to ascertain their true employment status.

The High Court has designed a test for determining whether a worker is an employee or independent contractor. In Hollis v Vabu Pty Limited (2001) 207 CLR 21 a multi-faceted test was developed in which the facts of the employment relationship were assessed against a number of key indicators. These indicators include, but are not limited to:

  • the level of control by the employer over the employee with respect to how and when the employee must carry out their duties;
  • whether the employer required the employee to work exclusively for them;
  • the terms of the employment contract;
  • whether the worker was working pursuant to his or her own business, or issued tax invoices and had an ABN;
  • whether the employer or the worker controlled the necessary items of work such as uniforms, equipment and vehicles.

In essence, a court will look beyond the formal title of an employment relationship or and will look to its true nature of substance.

Similarly, if an employee is engaged through a labour hire agency it does not necessarily mean he or she is not an employee.

Courts are prepared, in certain circumstances, to look past the “corporate veil” of labour hire agency and determine that an employee-employer relationship exists.

Why is this important?

If an employee’s true employment relationship is disguised from them it can mean they are not receiving their full entitlements.

This can mean missing out on superannuation, annual and sick leave, protection from unfair dismissal, or minimum conditions and entitlements under modern Awards or Enterprise Agreements. If you believe you may be the victim of sham contracting you should seek legal advice.

Make your voice heard - Victorian Government Inquiry

Additionally, anyone who has or currently is being subjected to sham contracting should consider providing submissions to the Inquiry or attending the public consultations and forums, listed here: Inquiry into the Labour Hire Industry and Insecure Work.

While the deadline closes Friday 27 November for written submissions, verbal submissions remain open for several months.

External Links

[1] Sydney Morning Herald: Wage fraud: Pizza Hut franchisees using 'sham' contracts to underpay driversABC News: Myer cleaners accuse retailer of underpayment, denying entitlements with 'sham contracting' practice.

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