This document discusses sham contracting and the risks associated with misclassifying employees as independent contractors. It summarizes a court case where a company was found to have sham contracts after reclassifying employees as contractors without changing their duties. It provides indicators to determine whether a worker is an employee or contractor. The document also outlines penalties and personal liability under sham contracting laws, and introduces an HR software called enableHR that helps ensure compliance with these laws.

1. Understanding
“Sham Contracting”
and how to protect your business
AFG Webinar 21-04-11
Richard Breden
Partner FCB Workplace Law

2. FACTS
FWO v Centennial Financial Services
• Centennial Financial Services re-engaged employees, who sold
and distributed the company’s financial products, as
independent contractors on a commission only remuneration
package.
• There were no changes in duties performed and no change in
the reporting structure or hours they were expected to work.
• They were not paid entitlements such as annual leave or
superannuation and were required to submit invoices for
payment.

3. DECISION
• By purporting to re-engage ‘Corporate Associates’ as independent
contractors Centennial had breached the Workplace Relations Act
s901 prohibition against sham contracting.
• HR Manager and Directors were held to be personally liable under
s728 Workplace Relations Act.
• It was irrelevant that the HR Manager was essentially a ‘typist’ and
was unaware of the unlawfulness of the new arrangements.
[The WR Act Provisions are similar to those under s357, 358, 359 Fair
Work Act]

4. Contractor or Employee?
• ‘Corporate Associates’ held to be employees on the basis that
Centennial:
– Gave them work, retained ownership of any clients they
introduced;
– Required they attend the office daily between specified
hours;
– Supervised their finances; and
– Required exclusivity.
• Other indicia: Centennial provided Corporate Associates with
mobile phones, office facilities and business cards, and the
Corporate Associates represented themselves as emanations of
the Centennial group of companies.

5. Centennial Financial Services
Independent
Employee
Contractor

6. Indicator Employee Independent
Contractor
Generally works standard or set Decides what hours to work to
Hours of work hours complete specific task
Performs work under the High level of control in how
Degree of Control direction and control of their work is done
employer on an ongoing basis
Has an ongoing expectation of
Expectation of Work work Usually engage for specific task
Bears the risk for making
Risk Bears no financial risk
profit/loss on each task.

7. Independent
Indicator Employee
Contractor
Entitled to have super
Superannuation Pays their own super
contributions paid
Provided by the employer, or Use their own tools and
Tools and Equipment
tool allowance provided. equipment
Income tax deducted by Pays their own GST and tax (NB:
Tax
employer 80% Rule)
Paid regularly, e.g. fortnightly, Has ABN and submits an invoice
Method of Payment
monthly when work is completed
Entitled to receive paid leave or
Leave No entitlement to paid leave
loading in lieu of leave (casuals)

8. Shifting Obligations
Direct Independent
Employment • Pay Worker
• OHS Obligations
Contracting • Contract Obligations
• Liability for work
• Unfair Contracts Exposure
Dismissal Exposure
BUSINESS CO • Industrial Entitlements
• Workers Compensation
• Superannuation
• Tax Administration
• Pay Worker
• Perform Work for Business Co
• Contract Obligations
• Be directed by Business Co Employment
• Extras if incorporated Ms. Worker

9. FWA Sham Contracting Provisions
S358 - Dismissing to engage as
S357 - Misrepresenting independent contractor:
employment as independent • Is the employee doing the same
contracting arrangement or substantially the same work?
S359 - Misrepresentation to
engage as independent contractor:
Making a false statement to induce
employer to work under an
independent contracting
arrangement.

10. RISKS
• WORKERS COMPENSATION
• SUPERANNUATION
PENALTIES •
•
PAYROLL TAX
SHAM CONTRACTING - $33,000 per contravention
• PAYROLL TAX
UNANTICIPATED • SUPERANNUATION
LIABILITY
• SHAM CONTRACTING FW PROVISIONS
PERSONAL
LIABILITY

11. RISKS
• Unanticipated liability
• Exposure to employee remedies e.g. unfair
COMMON LAW dismissal
• Increased vicarious liability
• Sham Contracting Provisions
COMPENSATION OR • UNFAIR CONTRACT
UNANTICIPATED
COSTS
• WORKERS COMPENSATION
PREMIUM
EXPOSURE

12. Introducing enableHR - AFG
• Partnered with AFG to meet
the new HR requirements
under NCCP
• NCCP compliant HR system
Business Size* Annual Fee
• Helps manage contractors
(excl GST) and employees under NCCP
and the Fair Work Act 2009
1 – 10 $495
11 - 24 $950
• Supports legitimacy of
25 - 50 $1,950
employment or contractor
relationship
*Includes employees and contractors
• www.enablehr.com.au/afg

13. Introducing enableHR - AFG
MORE INFORMATION: www.enablehr.com.au/afg
(02) 9922 5188
PURCHASE: Click on “SIGN UP” on AFG Homppage
COST AGAIN: $495 (1–10), $950 (11-25), $1,950 (26-50)
“The introduction of the NCCP and the Fair Work Act is frustrating due
to the distraction it causes to our core business.
enableHR, in conjunction with AFG, has taken the burden off our hands
through the implementation of a cost efficient, time efficient, simple to
use application
The protection enableHR provides and the administration and cost it
removes makes it worth its weight in gold”
Simon Orbell – Smart Move