Home - Sham contracting: When a contractor is actually an employee

UpdatesAug 17, 2018

Sham contracting: When a contractor is actually an employee

Earlier this year, a Pizza Hut franchisee was fined $216,700 by the Fair Work Ombudsman (FWO) for using a sham contract to underpay a delivery driver.

Earlier this year, a Pizza Hut franchisee was fined $216,700 by the Fair Work Ombudsman (FWO) for using a sham contract to underpay a delivery driver.

Instead of paying the driver as an employee, the employer asked him to provide an ABN so the delivery driver could be paid as an independent contractor, at a flat rate of $16 per hour.

However, as an employee, he would have been entitled to a minimum rate of $20.36 per hour and up to $40.72 per hour for overtime and public holiday work.

The driver also wasn’t properly paid other entitlements, including a per-delivery rate for use of his own vehicle, superannuation, or a uniform allowance.

The FWO ruled that the worker was an employee, not an independent contractor, as the employer had a level of direction, supervision and control over the driver who was not running an independent business.

In addition to the fine, the employer was ordered to back-pay the employee in full.

Could your business be accidentally caught up in sham contracting?

Charles Power, a partner at legal firm Holding Redlich, and Editor-in-Chief of the Employment Law Practical Handbook, explains what sham contracting is.

“Sham contracting occurs when a business arranges for a worker to form their own business to become a contractor so the business can avoid meeting its obligations if the worker was an employee,” Charles says.

He emphasises that: “if you determine that a work arrangement is covered by a modern award and the NES, you must ensure you are complying with the requirements of those instruments”.

Did you know that a contract for an individual to provide personal services on an ongoing basis has the potential to be an employment relationship?

How do you identify the difference between a contractor and an employer?

The differences can be subtle and Charles says employers should “compare the indicators of an employment relationship against the indicators of a contractor relationship to help you determine whether the worker is conducting their own business.”

Does the contractor:

Learn more about your legal obligations relating to contractors and employment contracts in I2 Independent Contractors and E1 Employment Contracts in the Employment Law Practical Handbook.

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