Employers warned over sham contracting perils

Business owners are being urged to raise staff awareness of sham contracting, after a NSW company was fined almost $17,000 for dismissing employees before rehiring them as contractors.


Federal magistrate Robert Cameron has fined two former managers of Centennial Financial Services a total of $16,950 over nine employees who were dismissed and hired as contractors.


The company’s owner, Rolf Mertes, was fined $13,200 while former HR manager Christopher Chorazy was fined $3,750. The penalties represent the first sham contracting prosecution brought by the Fair Work Ombudsman.


In his judgment, the magistrate said he accepted Chorazy has exercised “no independent judgment” in the sham contracting breaches.


“Nevertheless, as human resources manager, he should have been aware of, and at least attempted to give advice on, Centennial’s obligations”.


Sham contracting is where an employer tries to disguise an employment relationship as an independent contracting relationship in a bid to sidestep employment entitlements such as pay-as-you-go withholding tax and superannuation guarantee payments.


Under the Fair Work Act, employers are prohibited from dismissing, or threatening to dismiss, an employee to re-engage him or her as an independent contractor.


Employers who breach the act can be fined up to $33,000. Actions can be brought by a worker, a union or the Fair Work Ombudsman.


However, there is also information that hirers must be aware of, which should be clearly outlined by the business owner.


A government spokesperson says hirers are required to withhold an amount from payments, to an independent contractor for tax purposes, if:

  • The contract asks for amounts to be withheld.
  • They provide their work or services for a client under a labour hire arrangement.
  • They have not quoted their ABN.

“You may also have obligations to your independent contractors relating to payroll tax, workers’ compensation and insurance,” the spokesperson says.


“In some cases, the superannuation guarantee laws may also apply to payments for work or services by an independent contractor.”


Contracting arrangements

“As a hirer, you are protected from unauthorised industrial action by independent contractors. It is also unlawful for unions to threaten or take unauthorised industrial action against you.”


The Fair Work Ombudsman is currently auditing three industries – hair and beauty, cleaning and call centres, to identify cases where employees are being treated as contractors to avoid paying entitlements and to cut labour costs.


It is also auditing up to three 600 employers in the security industry over the next three months to ensure they are paying staff correctly and not engaging in sham contracting.


The FWO announced in April it would distribute up to 100,000 educational brochures on contracting arrangements, starting with members of key employee and industry groups around the country.


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