Record fines to company and director for sham contracting

 In Law

A company has been ordered to pay record fines of $238,920, and its director a fine of $47,784 for engaging in ‘sham contracting’ in relation to seven ‘contractors’ who should have been treated as employees.

The Fair Work Ombudsman (FWO) has recently gained orders against a transport company who treated seven airport shuttle bus drivers as independent contactors rather than employees. The judge found that the transport company had displayed ‘wilful blindness’ of workplace laws by engaging in the sham contracting activities.

The workers were paid fixed rates per shuttle bus run between Newcastle and Sydney airport, regardless of the time taken to complete the run and time spent waiting. As a result of being treated as contractors rather than employees (who are covered by an award and owed penalties, overtime rates and other employment related entitlements), the workers were underpaid multiple entitlements. The underpaid entitlements ranged from minimum hourly and penalty rates, overtime hours, public holiday penalties, payment for late or early work, as well as superannuation.

Incorrectly treating the workers as contractors also meant that the company had not complied with pay slip and employee record keeping laws set out in the Fair Work Act.

The FWO issued a press release about the decision and emphasised that ‘in cases where sham contracting is occurring, we look behind the often carefully drafted legal documents to determine what the correct classification for workers is’.
What are the risks for businesses engaging independent contractors?

  • Having written contractor agreements in place with independent subcontractors will not prevent those workers being considered by the FWO (or the Courts) to be employees.
  • Businesses who are reckless, or deliberately blind to the likelihood that their contractors are in fact employees, may be breaching sham contracting laws.
  • Incorrectly treating workers as employees in breach of sham contracting laws, expose businesses to significant costs. These costs include back pay for all employment related entitlements, such as: minimum hourly rates of pay, overtime rates, penalty rates for public holidays, weekend and other work, annual leave and personal leave, superannuation, etc. In addition, sham contracting penalties of up to $51,000 per breach apply for companies, and up to $10,200 for individuals.
  • The FWO can (and has previously) pursue directors, managers and other individuals involved in sham contracting, and seek fines against them personally.
  • Employees treated as contractors may not be covered by workers’ compensation policies as required. This creates exposure to further significant penalties and damages, particularly in the event of a work related accident.

What can I do to reduce the risks for me personally, and my business, if I engage independent contractors?

  • Businesses engaging independent contractors (whether through a company or an ABN) should seek specialist advice about whether their workers are contractors, or employees.
  • Businesses who engage workers who are likely to be employees, must take steps to ensure they meet all employment related obligations under applicable awards, the Fair Work Act and other applicable legislation.

This article was written by Denise O’Reilly, Director, O’Reilly Workplace Law
15 August 2013

If you have any questions about this article, or your obligations under workplace laws, please contact

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