Nearly $200k in penalties for sham contracts involving workers with disability

 

The company violated the Fair Work Act after it terminated the employment of three workers’ only to re-engage them soon after as independent contractors to perform the same duties.

In October 2020, the company provided each worker a “new contract” titled “Independent Contractor Agreement” (ICA). It included a number of terms suggesting a legitimate contract of employment. Additionally, the workers were required to produce an Australian Business Number and submit invoices for payment to receive payment from Doll House.

In the decision, Justice Goodman declared that the terms of the Independent Contractor Agreement (ICA) constituted "terms of employment." This was based on the fact that the "rights and obligations" specified in the agreement indicated that the workers were contracted to work exclusively for Doll House's business, rather than operating their own independent businesses. 

Justice Goodman found a "clear power balance" between Doll House Training and its employees, especially for two workers who each signed the contract because they felt they had "no alternative."

The company also did not compensate the workers in full at least monthly during their employment and failed to follow a Notice to Produce issued by a Fair Work inspector, which required the company to produce specific documents and records.

Justice Goodman described some of the workers as being "persons with disabilities, who had been searching for work and who were owed payments equivalent to the minimum wage", and one worker's evidence that "the non-payment caused her financial and other stress and that, as a result, she needed to borrow money from a short-term lender".

The company's failure to follow the Notice to Produce directly hindered Fair Work's ability to investigate its malpractice, which warranted more penalties.

"We treat sham contracting particularly seriously. We will pursue any employer who thinks they can take advantage of the power imbalance they have over workers, including those with disabilities as in this matter, some of whom felt that they had no alternative but to accept a sham contract or be jobless," said Fair Work Ombudsman Anna Booth.

"Enforcing the Fair Work Act's prohibitions on sham contracting helps protect employees' fundamental rights. If businesses unlawfully misclassify workers, it can lead to them not being paid the wages and entitlements the law provides to them as employees."

The sham contracting in this situation was especially deplorable when you consider the overwhelming power imbalance between the company and those of its workers who have a disability.

Key Points to Remember

Engaging in sham contracting arrangements is illegal and may result in heavy penalties by the court for non-compliance. 

Sham contracting is when an employer enters into an agreement with a worker to perform work as an independent contractor; however, based on the nature of the working relationship, the worker would be better classed as an employee. 

There are advantages to businesses regarding costs, risk, and liability to hire independent contractors rather than maintain employees. 

As of 27 February 2024, the sham contracting requirements of the Fair Work Act 2009 (Cth) have changed. Employers cannot defend a claim of sham contracting by saying that they thought it was an actual independent contracting situation unless it is 'reasonably believable' to do so. 

This is a higher standard than the previous requirement for this defence, which only required that they have not been reckless in believing that a worker was indeed an independent contractor. 

Being an independent contractor can be complicated, and there is a long litigation history. Several factors are considered when assessing the nature of a contract, comprising tests referred to as the 'control test', the 'multifactor test' and the' organisation test'. 

The most important of these is the control test which refers to whether the individual's duties and how and when they are performed are determined solely by the alleged employer, or whether the individual has autonomy over these.

The second test is the multifactor test, which considers various matters. No single factor is determinative, and none must be present. 

Employers who breach sham contracting provisions face substantial financial penalties, with each contravention potentially costing the company up to $93,900.

Key Differences between Contractors and Employees 

A contractor is an independent business entity engaged to provide services to another business. Unlike employees, contractors:

• Submit invoices for completed work.
• Oversee their taxation obligations.
• May or may not be entitled to superannuation contributions.
• Exercise a high degree of control over their work.
• Assume commercial and financial risks.
• Are typically engaged for specific projects.

On the other hand, employees:

• Receive a wage or salary.
• Have income tax deducted by their employer.
• Are entitled to superannuation contributions.
• Perform work under the direction and control of their employer.
• Receive paid and unpaid leave entitlements.