How to Identify a Sham Contract

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How to Identify a Sham Contract

January 22, 2022         Anthea Dinh-Tram

A sham contract occurs when an employer masks an employment relationship as an independent contractor relationship to avoid fulfilling employee entitlements, such as leave and superannuation. The Fair Work Act 2009 (Cth) makes it is illegal for an employer to:

  • Knowingly misrepresent employment as an independent contracting arrangement.
  • Dismiss, or threaten to dismiss, an employee for refusing to become an independent contractor. 
  • Dismiss an employee then rehire them as an independent contractor doing the same work.
  • Make false statements to influence an employee into becoming an independent contractor.

This article outlines how to identify a sham contract and what you should do if you have entered into one. 

Identifying a Sham Contract

If you meet the criteria for an employee but do not receive payments for leave, superannuation etc., then there is a high chance that you have entered into a sham contract. Consider the differences between an employee and independent contractor using the table below.

EmployeeIndependent Contractor
IntentionParties intend to have an employment relationship.Worker creates a tax file number (TFN) and signs an employment contract.Parties intend to have an independent contractor relationship. Worker provides an Australian business number (ABN) and signs an independent contractor agreement.
Expectation of WorkWork is expected to be ongoing. Work is for a specific, one-off assignment. 
Control Over WorkWorker is under the direction and control of an employer.The employer determines the work hours, location, and how work should be done. Worker has full control over their own hours, location, and how to go about tasks. 
Work Hours Unless employed as a casual employee, works a standard set of hours. No set work hours. Work hours are usually arranged between parties and depend upon how long it is estimated to complete the task. 
UniformWorker wears uniform or outfits according to workplace rules.Worker has free choice as to what they wear to work. 
Tools and EquipmentEmployer provides tools and equipment for work. Worker provides their own tools and equipment. 
Payment Worker is paid regularly (eg. weekly, fortnightly, monthly).Worker has an ABN and submits an invoice for any work they complete.
Working for Others Worker cannot work for others or ask others to complete tasks for them. Worker may delegate or subcontract services to another business or person.
Financial RiskThere is no financial risk involved because that is the employer’s responsibility. Worker is personally liable for any losses and profits made.Independent contractors often have their own insurance policy because they are liable for any injuries sustained during work.
TaxIncome tax is deducted by the employer.Worker pays their own tax to the Australian Taxation Office.
SuperannuationWorker is entitled to superannuation contributions paid into a nominated superannuation fund by the employer.Worker generally pays their own superannuation.
LeaveWorker receives paid leave (eg. annual leave, personal/carer’s leave, long service leave).Casual employees receive a loading instead of leave entitlements.Worker does not receive paid leave.

Note that these factors are general so someone may still be an employee with an ABN and invoice for work. You should consider these factors broadly.

What to do if you Have Entered into a Sham Contract

There are a number of claims you can make if you have been a victim of sham contracting. However, it is best to seek legal advice to work out the options most suited to your situation.

1) Reporting to the Australian Taxation Office (ATO)

It is very likely that an employer who engages in sham contracting does not meet their obligations to pay superannuation and tax. You may submit a tip-off form about your employer to the ATO. 

2) Lodging a Complaint with the Fair Work Ombudsman (FWO)

The FWO investigates cases of sham contracting. You may lodge a complaint about your situation to the FWO using this link: https://www.fairwork.gov.au/workplace-problems/fixing-a-workplace-problem/report-an-issue-anonymously

If the FWO finds that sham contracting is occuring, the FWO will either:

  • Issue your employer with letters of caution, compliance or other notices to inform them about their obligations under the law. 
  • Recommend mediation to you and your employer.
  • Take legal action against your employer in the Federal Circuit Court or Federal Court.

3) Making a General Protections Claim under the Fair Work Act 2009 (Cth) 

You may further make a general protection claim to the Fair Work Commission (FWC) if your employer has misrepresented your employment as an independent contracting arrangement, dismissed or threatened to dismiss you to re-engage you as an independent contractor, or induced you to enter into a contracting arrangement with false statements.

However, you must make your claim within 21 days of the date you were dismissed from work. If you have not been dismissed, you have 6 years from the date you entered into the sham contract to lodge a claim. 

In response, the FWC will either: 

  • Hold a conference in an attempt to settle any disputes between you and your employer.
  • Issue a certificate to that effect if the disputes are not settled.
  • Given consent, become an arbitrator to determine the matter for both parties. 
  • Make an application to the Federal Circuit Court or Federal Court to deal with the matter. 

Conclusion

Under the Fair Work Act 2009 (Cth), a sham contract is an illegal situation whereby an employer disguises their employment relationships as independent contractor relationships. To identify whether you have entered a sham contract, consider the extent to which you meet the criteria for an employee but do not receive 

its benefits, such as superannuation and leave. If you believe you are a victim, 

you should report your employer to the ATO, FWO, or make a claim to the FWC. 

The OpenLegal team is always open to provide legal advice and assist you in any claims against employers. Please, fill in the form on this page or call OpenLegal on 1300 337 997. 

About Anthea Dinh-Tram

Anthea works as a legal intern with OpenLegal, whilst studying a Bachelor of Communication (Public Communication)/Laws at UTS Sydney.