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Why ‘sham contracting’ can carry substantial penalties for employers

Knowing how to classify your staff can be a challenge.

Getting it wrong can have serious consequences.

It can seem simpler and more cost-effective to classify some workers as independent contractors. You might require these workers to have an ABN and submit invoices for their work. Since independent contractors are not employees, they do not have a minimum wage or leave entitlements. They will also need to handle their own tax and superannuation contributions.

‘Sham contracting’ happens when you classify someone as an independent contractor who should be an employee. It can be done intentionally or carelessly.

Just because your staff member has an ABN and submits invoices, they may not be an independent contractor. It is important to also note that you may need to pay independent contractors superannuation and include their pay in your Work Cover declarations (in Victoria).

The court will consider several factors, including:

  • How much control the person has over their work, including the choice to hire others to help.
  • How much control they have over the hours and days worked.
  • Whether they work for the employer on an ongoing basis, or for a specific task or time period.
  • Who provides the tools and equipment necessary to do the job.
  • Who provides insurance and assumes financial risk.
  • Whether they are paid a wage from which income tax is deducted or submit invoices and pay their own tax and GST.
  • Whether they are entitled to paid leave.

As this recent case shows, there are serious consequences if you’re found to have misclassified them.

In Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 119, a Full Court of the Federal Court found that two drivers who had worked for the company for 35 years were employees and not independent contractors.

The trial judge found that they were independent contractors because they:

  • Chose, paid for and maintained their trucks;
  • Formed business partnerships, issued invoices and paid GST; and
  • Organised their own runs and arranged for replacement drivers when they were on leave.

However, the Full Court disagreed, finding that the pair did not have sufficient control or autonomy to be genuinely independent.

It took into account the fact that they:

  • Worked set hours and days;
  • Marked their trucks with the company’s logo, and sometimes wore the company’s uniform;
  • Could not work for other clients;
  • Were told what to deliver each day; and
  • Had been taken on as employees and then told to become contractors.

Compensation has not yet been awarded but is likely to include 35-years’ worth of annual and long service leave. The employer also faces possible penalties.

If you are not sure whether you are classifying your workers properly, contact us on (03) 9592 3356 or via email at so we can help you assess the status of your employees and avert the risks that can come with misclassification.

Why ‘sham contracting’ can carry substantial penalties for employers : City Pacific Lawyers

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