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IR Society WA SHAM CONTRACTING – Are individual contractors being abolished?. Eleanor Jewell Senior Associate Norton Rose Australia 2 May 2012. Agenda. Relevance of distinction between employees and contractors Implications of contracting arrangements Risks of contracting arrangements

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ir society wa sham contracting are individual contractors being abolished
IR Society WASHAM CONTRACTING – Are individual contractors being abolished?
  • Eleanor Jewell
  • Senior Associate
  • Norton Rose Australia
  • 2 May 2012
agenda
Agenda
  • Relevance of distinction between employees and contractors
  • Implications of contracting arrangements
  • Risks of contracting arrangements
  • Sham contracting
  • Employee / independent contractor distinction – the tests
  • Managing the risks
relevance of the distinction
Awards and enterprise agreements

National Employment Standards

Unfair and unlawful dismissal

Unfair contract

Implied duty of good faith

Workers compensation

PAYG tax

Ownership of Intellectual Property

Superannuation

Pay-roll tax

Workplace health and safety

National Privacy Principles

Moral rights

Vicarious liability

Income splitting

Expense deductions

Bargaining

Relevance of the distinction
perceived benefits of contracting arrangements
Perceived benefits of contracting arrangements
  • Flexibility in ending relationship
  • Unfair Dismissal provisions don’t apply
  • No requirement to provide paid leave
  • No payroll tax
  • No workers’ compensation insurance
  • Company tax v income tax
  • Deductibility of expenses
  • No vicarious liability
risks of contracting arrangements
Risks of contracting arrangements
  • Sham contracting provisions
  • No implied duty of good faith
  • Risks of prosecution for unpaid tax
  • Superannuation Guarantee Charge
  • No statutory ownership of intellectual property
  • Enforceability of restrictive covenants
  • Risks of claims for unpaid entitlements
  • Inadequate insurance coverage
anti avoidance regimes
Anti-avoidance regimes
  • Extended definitions
    • Superannuation
    • Workers’ compensation
    • Payroll tax
  • ATO
    • Personal services income provisions
    • Taxable payments reporting obligations in the building and construction industry
sham contracting
Sham contracting
  • Must not represent employment as independent contract
  • Must not dismiss employee in order to engage as independent contractor for same work
  • Must not make misrepresentation to persuade employee to become contractor for same work

Fair Work Ombudsman v Centennial Financial Services 2011 FMCA 459

what is sham contracting
What is sham contracting?
  • What is a ‘sham’?

“… something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.”: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at [454]

  • True sham contracting arrangements (where principal seeks to mask a true employment relationship) are rare – more common scenario is where a principal intends to create a contractor relationship, however at law it is held to be an employment relationship
  • Sham contracting is not simply ‘mischaracterising’ a person as a contractor rather than an employee – involves a deliberate or reckless intention to treat an employee as a contractor
  • Other than sham contracting, may be other implications of an employment relationship:
    • Non compliance with minimum entitlements under the National Employment Standards (NES) and/or award conditions
    • Unfair dismissal or other employee rights under the Fair Work Act 2009 (FW Act)
    • Superannuation
    • Payroll tax
    • Workcover
sham contracting under the fw act
Sham contracting under the FW Act
    • Sham contracting provisions set out in Part 3-1 (General Protections) of the FW Act

Section 357 (misrepresenting employment as independent contractor relationship)

        • A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.
        • Subsection (1) does not apply if the employer proves that, when the representation was made, the employer: (a) did not know; and (b) was not reckless as to whether; the contract was a contract of employment rather than a contract for services.

Section 358 (dismissal)

  • An employer must not dismiss, or threaten to dismiss, an individual who:
        • is an employee of the employer; and
        • performs particular work for the employer;

in order to engage the individual as an independent contractor to perform the same, or substantially the same, work under a contract for services.

Section 359 (misrepresentation to engage as independent contractor)

  • A person (the employer) that employs, or has at any time employed, an individual to perform particular work must not make a statement that the employer knows is false in order to persuade or influence the individual to enter into a contract for services under which the individual will perform, as an independent contractor, the same, or substantially the same, work for the employer.
requirements of sham contracting under section 357
Requirements of sham contracting under section 357
    • Most common claim is under section 357(1) - key requirements are:
  • Must be a contractual relationship between the principal (alleged employer) and the individual (alleged employee) – or proposed contractual relationship
  • Must be a representation by the principal to the individual that the contractual relationship is a contract for service (independent contract) rather than a contract of service (employment contract)
  • The contractual relationship (or proposed contractual relationship) between the principal and the individual must be a contract of employment (employment relationship)
  • Onus on applicant to establish the above requirements
  • Defence under section 357(2):
      • Onus then shifts to employer to prove that when the representation was made, the employer did not know, or was not reckless as to whether the contractual relationship was an employment relationship
is there a contract
Is there a contract?
    • Contract can be in writing, oral or implied (or a combination)
    • In the absence of a contract between the purported principal and individual, no breach of the sham contracting provisions can be established
    • The existence of a contractual relationship is ultimately a question of law, to be determined objectively. Often straightforward – i.e. if there is a contractor agreement in place
    • Less certain for:
        • labour hire arrangements – contract between client and contractor?
        • Where there is a group of related companies (internal labour hire arrangements)
  • Possible for an applicant to claim that an entity entered into a contract as agent for another – however Courts will not be quick to imply agency agreements, even between related entities: Gothard (as recs and mgrs of each AFG Pty Ltd) (ACN 051 862 560) (in liq) and Others v Davey and Anor [2010] FCA 1163
is there a representation
Is there a representation?
  • What constitutes a representation:
      • Offer of contract
        • FWO v Centennial Financial Services Pty Ltd & Ors [2010] FMCA 863
      • Statements about the contract
        • “you will need an ABN”
        • “you are not entitled to paid leave”

CFMEU v Nubrick Pty Ltd [2009] FMCA 981

employment vs contractor relationship
Employment vs Contractor Relationship
  • What is the test?
    • Control Test - Degree and nature of control
    • Multifactor Test
    • Integration or Organisation test
    • Operating own business/commercial risk (‘economic reality/dependence test’)
    • The Entrepreneur test?

Sham contracting

control test
Control Test
      • Control Test - Degree and nature of control
  • “It is the totality of the relationship between the parties that must be considered”
  • Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 per Mason J

Sham contracting

multifactor test
Multifactor Test

Control

Exclusivity

Hours of work

Mode of remuneration

Provision and maintenance of equipment, materials and resources

Provision of paid leave, superannuation, workers compensation and PAYG tax

Ability to delegate

Obligation to work

Results engagement

Ability to terminate

Company, trust or partnership contractor

Case example 1: Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52

“In my opinion, on no sensible view of the evidence could it be said that the interviewers were conducting such a business on their own account, as distinct from participating in the business of the appellant”

Case example 2: Fair Work Ombudsman v Centennial Financial Services 2011 FMCA 459

Multifactor Test

Sham contracting

integration or organisation test
Integration or Organisation Test
  • Integration or Organisation test
    • Determining whether a person is part of or integrated into the operation of the business for which they are working helps the courts determine whether the authority to command exists

Vabu Pty Ltd v Commissioner of Taxation (1996) 81 IR 150

Sham contracting

economic reality dependence test
Economic Reality / Dependence Test
  • Operating own business/commercial risk (‘economic reality/dependence test’)
  • Case example: ACE Insurance Ltd v Trifunovski [2011] FCA 1204 (ACE case)
    • The Court found the distinction between an employee and an independent contractor to be rooted fundamentally in the difference between a person who serves his employer in the employer’s business, and a person who carries on a trade or business of his/her own.

Sham contracting

the entrepreneur test
The Entrepreneur Test
  • On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No. 3) [2011] FCA 366
    • The Court stated at [208] that the question of whether a person is an independent contractor in relation to the performance of particular work, may be posed and answered as follows:

Viewed as a practical matter:

(i) is the person performing the work an entrepreneur who owns and operates a business; and

(ii) in performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

If the answer to that question is yes, in the performance of that particular work, the person is likely to be an independent contractor. If no, then the person is likely to be an employee.”

Sham contracting

practical implications
Practical Implications
  • Can an individual be an independent contractor?
  • Case by case basis
  • What test is to be applied?
  • Trend of focusing on particular indicia
    • ACE Case and On Call: Does the worker serve the employer’s business or a trade or business of their own?
  • Less emphasis placed on other indicia
    • Roy Morgan Case – Little emphasis placed on no obligation to work
  • ↑ workers classified as employees → ↑ sham contracting risk

Sham contracting

defence not knowing or not reckless section 357 2
Defence – not knowing or not reckless – section 357(2)
  • No breach of section 357(1) if employer can prove that it did not know, and was not reckless as to whether, the relevant contract was a contract of employment
  • Where a sham contracting claim is made against a corporation, this defence will require pleading the corporate state of mind, through the relevant decision makers (section 793(2) of the FW Act) – i.e. the company’s directors, HR manager or even legal counsel
  • Onus on employer to establish defence – however will be sufficient if employer can demonstrate (through the decision makers) that it genuinely believed that the arrangements in place were legitimate contractor arrangements, and/or that it had a legitimate basis for that view: CFMEU v Nubrick Pty Ltd [2009] FMCA 981
  • The question whether taking a risk is unjustifiable is one of fact

Sham contracting

defence not knowing or not reckless cont d
Defence – not knowing or not reckless (cont’d)
  • In FWO v Contracting Plus Pty Ltd and Anor, an ‘omission’ to immediately seek advice or investigate, after a suggestion that workers may be employees and not contractors, demonstrated a ‘reckless disregard’ for the employer’s statutory obligations
  • Will a corporation be reckless if it:
    • Has previously obtained legal advice?
    • Has previously had its conduct or contractual arrangements condoned by a Court/Tribunal/Government Department?
  • Employers may need to waive legal professional privilege if part of a defence is that they previously obtained legal advice
  • Note – defence under section 357(1) only available to employer (usually the corporation), and is not available to individual managers/directors who are named as Respondents (accessorial liability)

Sham contracting

accessorial liability
Accessorial liability
  • Penalties can also be sought against managers and directors under the ‘accessorial liability’ provisions of section 550 of the FW Act (same wording as under section 728 of the WR Act)

“Involvement in contravention treated in same way as actual contravention

(1) A person who is involved in a contravention of a civil remedy provision is treated as having contravened that provision.

(2) For this purpose, a person involved in a contravention of a civil remedy provision if, and only if, the person:

(a) has aided, abetted, counselled or procured the contravention; or

(b) has induced the contravention, whether by threats or promises or otherwise; or

(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or

          • has conspired with others to effect the contravention.”

Sham contracting

accessorial liability cont d
Accessorial liability (cont’d)
  • A person will be accessorily liable if they have ‘engaged in some act or conduct which ‘implicates or involves him or her to the contravention’or if they have a‘practical connection’to the contravention: Qantas Airways Ltd v Transport Workers’ Union of Australia [2011] FCA 470
  • Further, in order to be accessorily liable, a party must have knowledge of the ‘essential matters which have gone to make up the contravention in question’: Yorke v Lucas (1985) 158 CLR 661
  • In FWO v Centennial Financial Services Pty Ltd & Ors [2010] FMCA 863, the HR Manager was accessorily liable for the contraventions as he was an active participant in the meeting where the representations were made (offer of contractor agreements)
  • Accessorial liability contraventions require the original contravention to be made out against the employer
  • Where individuals (such as directors) are named as Respondents, they will be entitled to claim ‘penalty privilege’ (privilege against self-exposure to a civil penalty)

Sham contracting

penalties
Penalties
  • Sham contracting provisions are civil remedy provisions
  • Maximum $33,000 per breach by a corporation, $6,600 for individual
  • No specific provision under FW Act to treat multiple contraventions of sham contracting provisions as ‘single course of conduct’, however the Courts have the discretion to do so
  • Employers often agree to certain facts in order to mitigate penalties

-ABCC v Rapid Formwork Constructions Pty Ltd [2011] FMCA 649

  • FWO v Contracting Plus Pty Ltd & Anor [2011] FMCA 191 – higher range of penalties awarded - $24,750 to $26,400 for each contravention (in relation to each worker)
  • Contrast with FWO v Centennial Financial Services Pty Ltd & Ors [2010] FMCA 863 – lower range of penalties awarded - $250 to $1,100 for each accessorial contravention by management

Sham contracting

considering the risks
Considering the Risks
  • Consider the totality of the relationship
    • identify and weigh relevant indicia
    • practically, running own business or not
  • Very subjective
  • Not just a matter of labelling
  • Is it worth it?

Sham contracting

slide26
Disclaimer
  • The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose Australia on the points of law discussed.
  • No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.

Sham contracting

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