Engaging Contractors: The Risks of Sham Contracting

Taking on contingent labour brings a multitude of benefits to your business. There are also risks. Let’s take a look at how you can prepare for contingent workers in your business, without suffering any negative statutory outcomes.

The Stats

Firstly, let’s take a look at the rising numbers of contingent workers in the workplace today:

  • 46% of HR professionals believe contingent workers will make up 20% of the workforce by 2020 (PwC)
  • In Australia, 23% of employers say they engage contingent workers, 44% of which is for ‘special projects’ – that is, short-term, finite projects best suited to contract talent (Hays)
  • And, the ABS has released figures which estimates a 9% rise in contingent workers across Australia’s workforce, up 2% in six year.
  • In China, there’s a seismic shift taking place. Traditional ‘employment’ is on the decline as workers opt for flexibility, greater freedom and to pursue entrepreneurial pursuits (PwC)

The Benefits

It’s no wonder. Given the many benefits of engaging contingent workers, organisations are jumping on board. Here are some examples…

  • A new technology system integration project arises for the business. You need change managers, technical expertise and other integration skills. All for a limited period. You bring these staff into the business, for that very purpose, and timeframe saving you overhead costs, ongoing labour costs, and statutory costs.
  • As a business is experiencing significant growth. Managing at scale can be successfully achieved with short-term, temporary labour.
  • A business is launching a new product or service. Launching this to market is taken care of by specialists in this field, who work to achieve specific outcomes within the agreed timeframe.
  • Introducing a more systematic approach to engaging contingent workers allows for a just-in-time staffing approach, which provides for less risk, especially for early-days organisations, experiencing expansion
  • An unforeseen requirement for temporary labour arises & the hiring manager has no time to source talent. They rely instead, on the services of a temporary staffing agency, who often can fill talent gaps quickly. The requirement is filled in a timely manner, without holding up the project
  • A strategic approach to managing contingent labour, offers organisations the opportunity to significantly reduce the cost of this category of labour. From onboarding to disengagement, the management firm keeps the cost of contingent talent, low
  • From a legislative standpoint, organisations who engage contingent labour are free from a number of statutory cost commitments including PAYG tax, payroll tax, FBT, workers’ compensation insurance, and superannuation

These are just a few example scenarios where the engagement of contingent workers is truly beneficial.

The Risks

Conversely, contract labour also presents organisations with – at times – complex statutory obligations, which if breached, can be incredibly costly or even terminal to a business.

And in the banking & financial services industry, there’s a growing demand for risk & compliance professionals, in light of the recent royal commission. Hence, the FWO and the ATO will now be even more vigilant regarding organisations toeing the compliance line when it comes to engaging non-permanent workers.

The key issue is this: if an individual is engaged as an independent contractor into a business, yet the FWO or the ATO deems them to be an employee, the price to pay for the organisation – and even the individuals involved – is heavy. The Fair Work Act 2009, will uphold a maximum fine of A$63,000 for EACH transgression.

Cost of sham contracting

For the organisation engaging contingent workers, it’s important they’re across the industry guidelines. Here are a few….

  • There’s no one, single determinant of what constitutes a ‘contractor’, so yes, this is a complex area
  • Likewise, there’s no single test which determines whether a worker is deemed an ‘employee’ or ‘contractor’
  • The legislation in this area is outdated, at best. Obtaining legal advice up front, is wise
  • Some rules of thumb to prevent a contractor being deemed an employee, include:
    • A contractor shouldn’t be entitled to all the perks of an employee
    • Conversely, a contractor should be entitled to an appropriate wage, in their ‘contractor’ working status
    • Just because a contractor has an ABN and submits invoices to the employer for payment, doesn’t necessarily mean they comply with the ‘contractor’ status rules
    • Contractors shouldn’t be receiving superannuation entitlements
    • Does the contractor have control over their work, or is it driven mostly by the organisation? If the latter, they’re more likely to be an employee
    • How is the contractor paid? Is it standardised, like it is for employees, or is it on completion of specific projects and tasks? The latter is the better scenario for contract workers
    • Who provides the tools & equipment to the contract worker? If all is provided by the employer, coupled with any of the above, may lead the individual to be deemed an employee

There’s also the concept of ‘sham contracting’, which is described on the business.gov.au website as

sham contracting

Sham contracting is also addressed under the Fair Work Act. Here are some of the stipulations, largely about what an employer can’t do:

  • Misrepresent an employment relations as an independent contracting relationship
  • Dismiss or threaten to dismiss a permanent employee in order to then engage them as an independent contractor
  • Make false statements to persuade an employee to become an independent contractor

The Fair Work Act, driven by industry watchdog the Fair Work Ombudsman, contains provisions to protect the rights of contract workers. Hence, it’s in the interests of employers to be familiar with the act.


More reading on this topic can be found below:

The Independent Contractors Act, 2006

The Fair Work Act, 2009

The Fair Work Ombudsman


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