News & Insights

The Federal Circuit Court of Australia (FCCA) has ordered a small business and its sole director to pay penalties totalling almost $170,000 for ‘sham contracting’.

legislative Background

Sham contracting occurs when an employer misrepresents a worker’s current or proposed employment relationship as an independent contracting arrangement. Sham contracting frustrates a worker’s access to employee entitlements and is prohibited under the Fair Work Act 2009 (Cth) (the Act).

fair work ombudsman v ava travel pty ltd & ors

The case before the FCCA concerned a small tour bus business named Ava Travel. Three of Ava Travel’s drivers received a text message from the company’s sole director indicating that their status as ’employees’ was being transferred into an ‘independent contracting’ arrangement.

As employees, the drivers had been entitled to loadings, penalty rates, minimum engagement pay and waiting time pay under the relevant Award. However, as independent contractors, the drivers were paid a flat rate of $20.59 per hour despite performing the same work and carrying out their duties in the same manner as they had while engaged as employees. As a result of the sham contracting arrangement, the drivers were each underpaid approximately $44,000 dollars.

Ava Travel’s sole director admitted to the breaches and voluntarily repaid the drivers in full.  Further, the Judge acknowledged that the contraventions came about through clumsiness and inadvertence rather than deliberate wrongdoing.

Nevertheless, Ava Travel was penalised $164,475 and its sole director was personally fined $3,825 by the Court. These penalties were separate and in addition to the requirement to rectify the underpayments.

lessons

• Employers who misrepresent a worker’s employment status, even by mistake, are at risk of exposure to severe pecuniary penalties and should, therefore:
  • be aware of the key indicia for distinguishing between employees and independent contractors and should take steps to ensure that their workers fit clearly within the respective categories; and
  • review all existing contractual arrangements to make certain that the appropriate working relationship has been adopted to guarantee compliance with the Act as well as any relevant award or enterprise agreement.
• Further, safeguards may need to be written into contracts of engagement, or where mistakes are identified, remedial measures may need to be taken, to ensure that working arrangements are not inadvertently and illegally misrepresented.

If you would like further information about sham contracting, or if you require tailored and practical assistance with your employment agreements or independent contractor arrangements, please contact our Employment, Safety and Migration team.

This article was written by Barney Adams, Associate and Erin McLeod, Law Graduate – Employment, Safety and Migration.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.