The findings of our recent investigation into sham contracting and the misclassification of workers illustrates a need for employers to exercise greater diligence when engaging contractors to ensure they do not breach workplace relations laws.
Most of the errors we identified, where businesses had engaged workers as contractors when those workers should more properly have been classified as employees, were not deliberate.
But some examples showed that little thought had been given to the legal tests that must be satisfied for a worker to be correctly classified as a contractor.
For instance, it is difficult to see how a cleaner who performs simple work for only one cleaning business, wears that business’s uniform, operates the business’s equipment and accepts little or no commercial risk, can be defined as anything other than an employee.
Similarly, while call centre workers may well be genuine contractors involved in supporting specialist products for which they have unique expertise, many call centre environments involve workers engaged in rigidly organised shift work and strictly enforced break periods and who are required to stick to tightly scripted conversations.
It is difficult to see how a worker in these circumstances exercises control over their own work and can be considered to be running their own business in an effort to make a profit.
Fair Work Inspectors found a number of employers had received advice from accountants on how to structure their operations and it appeared the legality of the arrangements under relevant workplace laws had not been considered.
They also identified a number of employers whom we believe knowingly or recklessly misrepresented the employment relationship to their workers as one of independent contracting, contravening the sham arrangement provision of the law. We are considering legal action in some cases.
Sham contracting occurs when an employer attempts to disguise an employment relationship as an independent contracting relationship, thereby avoiding obligatory rates of pay and other entitlements, giving it an unfair competitive advantage.
We launched our investigation in April in response to intelligence from various sources and concerns raised by key stakeholders, including employee and employer groups and members of parliament.
We focused on three industries: cleaning services, hair-and-beauty and call centres.
Of the 91 enterprises we audited that engaged contractors, 21 (23 per cent) were assessed as having misclassified employees as contractors. We assessed 14 of these cases as being inadvertent and seven as being sham contracting. There are eight audits yet to be finalised and these figures could increase.
However, drawing conclusions from these statistics about the prevalence of sham contracting and unintentional misclassification of workers as contractors more generally would not be valid since the audit sample was not randomly selected.
However, these problems are of concern to us and we certainly do not believe they are confined to these three industries alone.
Misclassification of workers is a serious issue because it can lead to a contravention of the National Employment Standards (NES) and terms of a Modern Award or Enterprise Agreement.
It can also result in contraventions of employer obligations to provide employee records and pay slips and may expose employers to back-payment of outstanding entitlements.
Businesses that engage contractors, particular for lengthy periods of time, should periodically review the nature of the relationship to assess whether the arrangements have become more like employment.
Apart from denying the worker the benefits attached to employment, the business is potentially exposed to risk arising from workplace law, taxation law, superannuation law and workers’ compensation law if the worker should be considered an employee.
Employers and workers seeking advice or assistance regarding contracting and sham contracting can visit the Fair Work Ombudsman’s website at www.fairwork.gov.au/contractors
Nicholas Wilson
Fair Work Ombudsman