Legislative changes are being considered by a Treasury discussion paper which (if implemented) will make it harder for sham contractors to show that they have inadvertently misrepresented an employment arrangement and result in higher penalties for sham contractors.

What is sham contracting?

As you may already be aware, there are different legal and taxation consequences which arise from employer employee relationships and principal contractor relationships.

Specifically, the Fair Work Act 2009 (Cth) (“FW Act”) prohibits the act of “sham contracting” which refers to a situation where an employer disguises an employment relationship as an independent contracting relationship, to avoid their employment obligations.

In particular, under the FW Act, an employer is prohibited from:

a. misrepresenting an employment relationship as an independent contracting relationship (s357);

b. dismissing, or threatening to dismiss an employee in order to re-engage the employee as an independent contractor to perform substantially the same work (s358); and

c. knowingly making false statements to persuade or influence an employee to become an independent contractor to perform substantially the same work (s359).

Current penalties and implications

Where an employer is found guilty of breaching the FW Act with regards to the above provisions, they may face civil penalties per contravention.  The penalties for contravening the FW Act can include a penalty of up to $12,600.00 (per contravention) for an individual and $63,000.00 (per contravention) for a body corporate.

 In addition to this, contractors do not receive some of the entitlements and protections of the FW Act, such as minimum wages, unfair dismissal, paid leave etc. and also generally miss out on superannuation and workers’ compensation.  Therefore, the other possible implications for incorrectly classifying an employee as a contractor is that the employer could be liable to bear the full range of employment obligations in respect of the employee e.g. pay minimum wages and entitlements such as accrued leave entitlements and overtime, payroll tax, workers’ compensation obligations and recognise unfair dismissal rights.

Background to the Treasury Paper

In the 2018-19 Budget, the Government announced that it would conduct a review of existing criminal offences, and civil and administrative penalties for “black economy activity”.

The “black economy” refers to people (such as sham contractors) who operate entirely outside the tax and regulatory system or who are known to the authorities but do not correctly report their tax obligations.

As part of the review, the Government is consulting with stakeholders about how it could implement the Black Economy Taskforce recommendation contained in last year’s report by the Black Economy Taskforce to introduce a modern offences regime to tackle the black economy.

The Treasury Paper

The Treasury paper discusses how a “targeted, stronger and more visible approach to enforcement” can be implemented to target black economy activities and seeks views on a number of proposed amendments to black economy offences, penalties and streamlining prosecution processes.

With regard to the review of penalties for sham contracting, the paper asks for submissions regarding:

a. how much the current penalties should be increased by; and

b. whether the existing “reckless” threshold contained under s357 of the FW Act for prosecuting employers should be lowered to a “reasonableness” test.

Currently, Employers are able to avoid penalty by demonstrating that they did not know and were not reckless as to whether the contract was a contract of employment rather than a contract for services. The recommendation seeks to amend the FW Act to a “reasonableness” test to address the weaker incentives under the current “recklessness” test and remove the high burden of proof required to establish “recklessness”.  For example, employers could be required to show that at the time the representation was made they could not reasonably be expected to have known that the contract was a contract for employment rather than a contract for services

The paper also considers whether non-monetary sanctions should be adopted, such as precluding companies from bidding on Government procurement contracts.

An important reminder for Companies

The contemplation of these changes is an important reminder for companies to ensure that contractors are engaged under a “genuine” contract.

In determining whether such an arrangement is “genuine” there are a number of factors that the Courts have considered which may indicate a person is an employee or an independent contractor, e.g. a contractor will invoice for hours worked, pay for their own expenses, set their own hours of work etc.

However, keep in mind that no single factor will define a relationship as one of employment or one of an independent contractor.  Each relationship has to be assessed on a case by case basis.

If you need advice regarding whether your arrangement with a contractor is a “true” independent contractor arrangement, contact the team at HR Law for advice.

If you would like to have your say on the treasury paper, you can submit submissions up until 21 December 2018 at


The content of this article is intended to provide a general guide to the subject matter.  Specialist advice should be sought about your specific circumstances.

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