Sham Contracting Arrangements – The Risk is Getting Bigger!

If your company is one of the many that engages independent contractors to increase flexibility and reduce the costs and risks associated with employing staff, you should read this blog carefully.

In a number of recent cases before the Administrative Appeals Tribunal and the Federal Court, the Australian Taxation Office (ATO) has succeeded in its argument that contractors were in fact employees with a consequence that the employers were liable to back-pay the contractors’ superannuation entitlements.

Over the past year, the ATO’s audits of small to medium sized businesses has netted more than $320 million in super guarantee charges from businesses that utilised “sham” contracting arrangements to disguise employment relationships with their workers.

But is this a new thing? No, not really.

The reality is that this is yet another signal to employers, and a strong one at that, that companies that enter into “sham” contracting arrangements are taking on far greater risks than the risks they seek to avoid. This message has been put to employers with increasing ferocity by all regulators that have anything to do with the workplace (e.g. the ATO, Offices of State Revenue, the Fair Work Ombudsman, the various WorkCover Authorities but to name some).

What is the risk for your company?

The risks for a company that utilises sham contracting arrangements include:

–          Back-payment of contractors’ superannuation entitlements to the ATO

–          Back-payment of PAYG tax liabilities to the ATO

–          The possibility of personal liability for directors for any ATO liabilities (not a very comfortable position for most directors to find themselves in)

–          Payment of payroll tax liabilities to the relevant Office of State Revenue

–          Claims for payment of workers compensation premiums by WorkCover Authorities

–          Payment to the worker of all statutory entitlements (annual leave + personal leave) together with interest

–          Fines and penalties for breach of various laws.

What should your company do now?

1. Assess whether your contractor relationships are in fact employment relationships. For guidance on this, please refer to our recent blog.

2. If the worker is an employee, undertake a review of the modern awards that may apply to that role and take immediate steps to transition the worker to employment status (i.e. enter into an employment agreement, have the employee complete the relevant employment declaration forms, induct the employee as you would any other).

3. If the worker is, in fact, a contractor, ensure that agreements and operational systems and procedures are in place to support this relationship on an ongoing basis. It is remarkably easy for a worker to slide from contractor status to employee status without the employer knowing it.

If you would like assistance with assessing and addressing your contracting arrangements please contact David Griffiths at CompliSpace on +61 2 9299 6105 or at