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Taking the con out of contractor


If your business doesn't use individual contract engineers, marketers, accountants, cleaners or any other form of contractor, you can happily skip this article. However, if you do, it's important to understand what has just happened to the law governing this kind of work.

Late last week (8 October) the Federal Court released the first decision on a sham contract prosecution in Australia.

Sham contract legislation was created by the Howard government in 2006. It's a provision now of the Fair Work Act (FWA). The Howard legislation was certainly a global first and is possibly still the only law of its type in the world.

The idea to outlaw sham contracts arose at the International Labour Organisation (ILO) in 2006 when it declared self-employment to be legitimate. The ILO also called on governments to prevent sham arrangements, which Howard implemented. A sham contract exists according to the FWA and the ILO if someone misrepresents what is actually an employment arrangement, passing it off as an independent contractor arrangement. Conceptually it involves a low level form of (non-criminal) fraud. Nonetheless, it is still a con.

The Fair Work Ombudsman is charged with investigating and prosecuting shams, but in more than two years, it appears it hasn't found a case where a prosecution could be concluded. This first prosecution was conducted by the construction union the CFMEU against Nubrick Pty Ltd.

In this case a manager had engaged two workers in a brick factory as 'independent contractors.' It seems that both the manager and the workers believed that having an Australian Business Number (ABN) secured their self-employment status. The judge however found the workers were in fact employees of Nubrick.

The CFMEU asserted that the finding of employment was enough to prove a sham; involving a potential hefty fine. The judge disagreed, ruling that for a sham to exist under the FWA, there must be an intent to deceive or misrepresent. In this case the manager at Nubrick and the workers genuinely believed that an ABN was sufficient for self-employment to exist. An error had been made and an error does not constitute a sham.

But the CFMEU is not happy. In their often-used class-warfare language they claim the decision is giving the "green light to bosses". They are calling for the FWA to be changed. But they'll need to convince the ILO to change its position as well.

The judge's decision drew on significant legal precedent in giving judicial interpretation to the FWA sham contract provisions. It's a very sensible decision.

The law is quite settled on what constitutes the difference between an independent contractor and employment contract. At Independent Contractors of Australia we call it a 'swinging pendulum' test (for a summary of the subtests, click here).

But in practical application there can be confusion. Understanding the subtests and applying them consistently requires managerial knowledge and attention to detail. I've looked at and advised on lots of arrangements and the level of accurate knowledge by Australian managers is low. They persistently get it wrong even if the intent is good.

Most common misunderstandings relate to the use of ABNs, which has been highlighted with this Nubrick case. Another myth, particular held by accountants, is the supposed 80/20 rule which is in fact irrelevant to common law. Too many managers and businesses rely on a lawyer's standard form contract in a 'set and forget' process. Unfortunately this doesn't help because the courts will always 'look through' the written to find truth in the behaviours of the parties.

It is management systems which are the key and in it's in this area where there's a big need to lift performance.

Over the last several years, tax and general law have become progressively settled on the independent contractor issue. Increasingly there's little excuse for implementing bad or incorrect contracts.

People might make genuine errors which the courts will understand. But at some point courts will become impatient with real or particularly feigned ignorance on matters which businesses should make themselves aware of. Sham contract convictions are inevitable if businesses fail to upgrade their behavior.

This is not something that can be ignored. The self-employed make up 28 percent of the private sector workforce. It's normal now for independent contractors to provide services to all sorts of businesses. Big holes in corporate operations would emerge if independent contractors were not utilised. It's necessary, however, to engage the sector properly.

That's the main lesson from this first sham contract prosecution. Expect more activity on this issue.

From the Business Spectator, October 2009.

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