SME business owners warned of dangers of sham contracting

Category: News

SME business owners, particularly those in the building and construction industry, are being warned they could breach of Australian workplace laws and face heavy penalties from the ATO as a result of increased scrutiny on ‘sham contracting’.

Law firm TressCox Lawyers warns that, with an increasing number of businesses seeking flexible workforces, the ATO has found many employers are trying to get away with using independent contractors to avoid being subject to the obligations of engaging workers as employee – a practice sometimes referred to as ‘sham contracting’. This has resulted in a recent amendment to taxation legislation, which came into effect earlier this month, to demand reports on payments made to sub-contractors. ContractorLG

TressCox partner Nick Duggal explains that, while hiring contractors potentially offers financial and practical benefits – such as avoiding annual leave, superannuation and responsibility for worker’s compensation insurance – businesses need to be wary of the potential dangers of doing so.

“Businesses need to be more aware of the distinction between contractors and permanent employees, because the ATO is specifically targeting this area,” Duggal says. “To be regarded as a contract worker under the Act, the employer cannot have control over the manner in which the contractor undertakes tasks on a day to day basis.

“Secondly, if a full-time employee provides services that would allow them to be in business for themselves, then they are more likely to be considered a contractor, not an employee. There is certainly a heightened focus on enforcing ‘sham contracting’ provisions, so it’s imperative employers take heed of the warnings and avoid potential action and any harm to their businesses.”

Duggal offers the following practical advice for employers who may unsure of where they stand in relation to ‘sham contracting’:

  • Undertake a review of their contracting arrangements to ensure they are properly categorised.
  • Seek advice or become familiar with the legal tests for determining whether a worker is an employee or an independent contractor.
  • Train managers involved in recruitment to correctly identify a true contracting arrangement and understand the operation of the ‘sham contracting’ provisions of the Fair Work Act.

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