Sham contracting is an attempt by an employer to misrepresent or disguise an employment relationship as an independent contracting arrangement.
Employers may do this to avoid having to give an employee their proper work entitlements, such as minimum rates of pay and leave entitlements.
Sometimes, employers dismiss, or threaten to dismiss, employees if they don't agree to become independent contractors. This is against the law.
What's an employee & what's an independent contractor?
There are a number of indicators to help tell the difference between an employee and an independent contractor.
Note: No single point below makes a person either an employee or independent contractor.
Employees
- Perform work, under the direction and control of their employer, on an ongoing basis
- Generally work standard or set hours
- Bear no financial risk (this is the responsibility of their employer)
- Are entitled to have superannuation contributions paid into a nominated superannuation fund by their employer
- Have income tax deducted by their employer
- Are paid regularly (e.g. weekly / fortnightly / monthly)
- Are generally entitled to get paid leave (e.g. annual leave, personal / carer's leave, long-service leave) if they are a permanent employee.
Independent contractors
- Decide how to carry out the work and what expertise is needed to do so
- Bear the risk for making a profit or loss on each job
- Generally pay their own superannuation and tax, including GST
- Generally have their own insurance
- Are contracted to work for a set period of time (for example, 2 months), or to do a set task
- Decide what hours to work to complete the job
- Generally submit an invoice for work completed or are paid at the end of the contract or project
- Do not get paid leave.
What’s the difference?
No single point makes a person either an employee or an independent contractor, it requires an overall assessment of all the factors. These case studies compare the nature of different employment arrangements to show the difference between independent contractors and employees.