An employee returning from parental leave has requested to become a contractor. The plan is to pay them an increased hourly rate as they will no longer accrue leave and for them to pay their own tax and superannuation. Can we do this?
There are many risks associated with this scenario with the potential of it being deemed a sham contracting arrangement the most significant.
Although there is no standard legal definition that distinguishes between an independent contractor and an employee, a sham contracting arrangement may arise when an employee is misrepresented as a contractor and the organisation avoids the responsibility of paying employee entitlements such as accrual of leave, tax and superannuation.
This is especially the case if the employee was previously performing a role, and immediately becomes a contractor that performs substantially the same role – as would seem be the case in this scenario.
Under the Fair Work Act 2009 (FW Act), employers must not dismiss an employee in order to engage them as an independent contractor to perform the same, or substantially the same, work. An employer also cannot knowingly make a false statement to persuade or influence an employee to become an independent contractor. Doing so would constitute a breach of the FW Act and put the organisation at risk of serious penalties and potential backpay of entitlements.
Importantly, an individual involved with decision making (such as an HR Manager) can also be held vicariously liable and personally fined for knowingly allowing a sham contracting arrangement to occur.
Further, the courts and tribunals use a range of tests and indicators to assess if an individual is a genuine independent contractor or is an employee. These indicators vary on a case by case basis and may include the degree of control over how work is performed, expectation of work, provision of own tools and equipment, method of payment and exclusivity of work.
The issue of sham contracting often arises when an employee disguised as a contractor is advised their services are no longer required, which may prompt them to seek access to the unfair dismissal remedies which ordinarily would have been afforded to employees.
Employers with concerns around their contractor arrangements are recommended to contact the Ai Group Workplace Advice Line on 1300 55 66 77 for further discussion.
