Contractor or Employee? Sham Contracting in the Building and Construction Industry

The Fair Work Act 2009 (the FWA’) prohibits a person from misrepresenting ‘employment’ as ‘independent contracting’, commonly known as ‘sham contracting’.

Section 357 of the FWA provides that: –

‘…a person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.’

It is common for builders and other participants in the construction industry to engage contractors to carry out specific trade work for example carpentry, painting, concreting and plumbing. However, it is important to understand the difference between an independent contractor and an employee so as to ensure you are not breaching the FWA.

Essentially, an employer is prohibited from offering a person a role as an independent contractor when the position is effectively a contract of employment. By treating the worker as an independent contractor as opposed to an employee the employer evades the obligations and rights that would normally arise from an employment relationship including employment entitlements.

However, the distinction between an employee and independent contractor is not always straightforward. Generally, a Court will look behind the title given to the arrangement, to identify the factual substance of the relationship.

Generally, an employment relationship is an exchange of labour (time, skill and effort) for remuneration and the employee serves the employer as opposed to carrying on a business in his or her own right. The Court may consider the following in determining whether the worker is a genuine contractor or is in fact, an employee:

1. the control the employer has over the worker;
2. whether the worker works exclusively for the employer;
3. the provision of a uniform, business cards, etc. from the employer;
4. whether the worker undertakes work personally or is free to delegate to others;
5. the location of the work;
6. the method of payment for the work performed – whether at an hourly rate or on completion of a specific project;
7. the responsibility for acquisition of materials and maintenance of equipment;
8. the creation of goodwill of saleable assets through the work performed;
9. the allocation of risk and profit associated with the work;
10. the degree of integration the worker has with the entity for which it works;
11. the existence of leave, taxation, superannuation payments, etc.

You should seek legal advice if you are engaging a worker that may be considered an employee as opposed to a genuine contractor. The implications of not considering and seeking advice about these issues may lead to significant costs.

If you or someone you know would like more information or some advice about whether these matters affect you, please contact us on (07) 5458 6855 or email mklein@kleinlegal.com.au.