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Sham Contracting

Monday, August 08, 2011
Independent Contractors – another pitfall, personal liability

The IT industry has a long history of using independent contractors to supplement permanent staff and to resource customer projects. From a legal (and tax) perspective many of these arrangements may be “shams”. If a contractor is in fact an employee, there can be serious consequences for the employer, including a legal liability for PAYG, superannuation, workers compensation premiums etc. This is the case regardless of what the contractor agreement may say to the contrary. Penalties can be significant.

A recent case highlights however, that it is not only the employer that needs to be worried.

Recent case - Fair Work Ombudsman v Centennial Financial Services Pty Ltd & Ors [2011] FMCA 459
In this recent case, both a Director and a Human Resources Manager of a failed financial services company were found to be personally liable for their participation in sham contracting arrangements.

Background in brief

Mr M was the sole director and sole shareholder of the employer company (Centennial). Mr C was the former HR manager. In order to reduce costs, Centennial changed the status of a number of workers, from employees to contractors. The people’s duties remained the same but Centennial ceased to pay them wages but engaged them on a commission only basis. Centennial did not pay them for hours spent attending training sessions when they would have been entitled to the minimum wages (at least). In addition the employees no longer had the benefit of entitlements or other protections e.g. annual leave, superannuation. Centennial was in liquidation at the time of these proceedings.

The actions of Mr M and Mr C in changing the status of the employees were found to constitute multiple breaches of the Workplace Relations Act (WRA).

The former HR manger was held personally liable even though it was accepted by the court that he had exercised no independent judgement in relation to the sham contracting, was overborne by the Director and just following instructions. However, it was found that given his role and experience, he should have been aware of and attempted to give advice to the company about its obligations.

The court also accepted that neither the Director nor HR Manager knew that Centennial’s actions were contraventions of the WRA. However, their actions were not inadvertent as they intended the financial consequences which resulted. Clearly also the Director as the sole shareholder would directly benefit from the reduced costs.

The penalties in total were $13,400 for Mr M, the Director and $3,750 for Mr C, the former HR manager. These amounts were to be paid directly to the affected workers. The penalties imposed were intended to specifically contain an element of deterrence.

Review your contractors!
To avoid not only corporate responsibility but potentially personal liability, review your contractor/consultant arrangements and ensure that you are not “sham” contracting.

Consequences if you don’t comply
As seen in this recent case financial penalties may be applicable to individuals involved in the contraventions not only to the employer company.
The HR Manager’s reputation was severely affected by the proceedings which were widely publicised and the court noted that the events at Centennial “had a chilling effect on his career in human resources and that he has seen a significant decline in his income which would tend to increase the impact on him of any financial penalties”. Despite applying for thousands of positions Mr C had been unable to find a permanent role. The penalties were imposed despite Mr C’s submissions including that in all likely he would be bankrupt as a result.

Pym’s Technology Lawyers have provided advice to many IT suppliers on a range of issues relevant to independent contractor agreements.


Author: Peta Maloney, Director, Pym’s Technology Lawyers.

Disclaimer: This is general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Pym’s Technology Lawyers Pty Ltd is a specialist IT and commercial law firm. It has liability limited by a scheme approved under Professional Standards Legislation.

Independent Contractor Agreements and Employment Agreements

Tuesday, July 26, 2011
The engagement of an independent contractor can be a minefield for the ill-advised. The rationale for engaging an independent contractor is to benefit from their expertise in performing a specific task, without needing to enter into an employment relationship.  Unfortunately for business managers, however, there have been many cases in which the courts have determined that individuals who were thought to be independent contractors were in fact employees, leaving the business liable to pay employment entitlements.  Clearly, engaging an independent contractor can be a minefield for the ill-advised!

The importance for businesses to obtain appropriate advice before engaging the services of an independent contractor is highlighted by the decision of the Honourable Justice Mordy Bromberg in On Call Interpreters & Translators Agency Pty Ltd v Commissioner of Taxation. In this case, Justice Bromberg found that thousands of interpreters who were employees of the Company had wrongly been treated as independent contractors, and that the company was thus liable to pay out five year’s worth of employer contributions to superannuation for each of the affected employees!

Essentially, the difference between an employee and an independent contractor is that the former is supervised by the employer, whilst the latter controls how the work is carried out. Independent contractors are likely to have special expertise which limits the ability of the client from stipulating the manner in which the work is to be completed. However the case law demonstrates that the test for distinguishing between employees and independent contractors is not so cut and dry, and in reality, recent technological advancements which have facilitated increasing flexibility in work arrangements have also made it increasingly difficult to distinguish between the two forms of work arrangements.

Clearly then, it is crucial for companies considering engaging independent contractors to seek advice and ensure that their commercial arrangements are formalised appropriately to reduce the risk of the independent contractor being deemed to be an employee.

The first step in preparing to engage an independent contractor is to develop an Independent Contractor Agreement. These Agreements represent a contract for service, that is to say the performance of work by an independent contractor, rather than a contract for employment.

Where one of the parties to an Independent Contractor Agreement is a Constitutional Corporation, the relationship is regulated by the Independent Contractors Act 2006 (Cth) (“the Act”). The Act encourages independent contracting as a legitimate form of work arrangement, and protects the status of independent contractors by preventing interference with the terms of genuine Independent Contractor Agreements.

The Act has also established a new Federal Unfair Contracts Jurisdiction for Independent Contractors. This part of the Act allows a party to an Independent Contractors Agreement to apply to the Federal Court of Australia or the Federal Magistrates Court on the grounds that the contract is unfair and/or harsh.  In reviewing such an application, the Court may have regard to the relative strengths of the bargaining positions of the parties, including whether there was any undue influence or unfair tactics, and whether the total remuneration for the independent contractor under the agreement is likely to be less than that of an employee performing similar work.

For example in November 2010, the Federal Magistrates Court found that Sydney-based finance company Centennial Financial Services Pty Ltd had terminated the employment of nine employees and unlawfully sought to re-engage them as independent contractors performing identical work as in their former employ.  These employee/contractors were paid on commission, and as a result of being deprived of wages and other entitlements had been underpaid by a grand total of $39,533. The wrong categorisation of employees as independent contractors can expose employers to significant penalties; in this case the former owner and Human Resources Manager of Centennial Financial Services were fined a total of $16,950.

Engaging the services of an independent contractor can allow businesses to benefit from a contractor’s specialised knowledge and ability to complete specific tasks efficiently, without having to enter into an employment relationship. However it is critical for businesses to seek advice prior to engaging an independent contractor in order to minimise the risk of costly litigation.


Author: Nick Stevens, Stevens & Associates Lawyers.

Stevens & Associates Lawyers have provided advice to many clients on how to avoid the pitfalls in engaging independent contractors.

Disclaimer: This article provides general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Stevens & Associates Lawyers is a boutique industrial relations and employment law firm. It has liability limited by a scheme approved under Professional Standards Legislation.

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