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Sham Contracting

The Law Dictionary of the Blacks describes 'sham' as (i) anything which is never as it appears; a counterfeit; (ii) an individual that profess to be what he isn't; a fake person. The Dictionary of the Law Lexicon describes 'sham' as fine in presentation but inaccurate in reality[1].

To determine the ideal framework of contract law in job position, it becomes important to analyze what sham self-employment is referred to. In[2] The judge described Sham contracts as any contracts whose clauses are 'distinct from the real legal rights & responsibilities that the parties wish to establish.' That means where the written contract does not adequately reflect the de facto contract among 2 (or more) parties, a sham contract subsists. It can also be stated that a well-established theory of contract law is the concept of a sham contract. In the domain of sham self-employment, such a concept was specifically applied as it was stated that the conditions would represent the truth of the case 'not only at the beginning of the contract, but as time goes on.' As a consequence, the present concept of a sham contract varies from the conventional contract ideology of employment law. As far as contract law is concerned, for it to be defined as such, the parties must plan a contract to be a sham from the outset. A further variation of meaning is that "all parties to a contract must have a shared purpose" of contract law to mislead the courts or a third party as to their real motives, although it is most frequently the case in the sense of employment that the weaker party "can be the object of the deception itself." This represents the discrepancy in a business agreement (where the deal demonstrates the true compromise in the preferences of all parties) versus an employment contract (where there is stronger negotiating power inequality), which justifies the distinction between the meanings[3].

While there is no standardized legal concept that differs between an employee & an independent contractor, a sham contractual agreement can occur where an employee is misreported as a contractor, and the entity escapes the burden of providing individual welfare benefits such as accumulation of leave, salary, and superannuation.

This is particularly the case if the worker has previously served a position and subsequently becomes a contractor who executes the same function substantially, which would appear to be the case in this situation. Under the Fair Work Act 2009 (FW Act), employers are not allowed to fire an employee to hire them as an independent contractor to do the identical or significantly the same task. An employer is therefore unable to make a misleading assertion intentionally to induce or persuade an employee to be an independent contractor. Doing so would be a violation of the FW Act and placed the corporation at risk of substantial fines and eventual back pay of privileges.

Pertinently, a person engaged in decision-making (for instance HR Manager) will also be held responsible vicariously and fined for intentionally providing for a sham contractual scheme. In addition, a variety of assessments and metrics are used by the courts and tribunals to determine whether a person is a legitimate independent contractor or is an employee. These metrics differ on a case-to-case level, which can entail the level of influence about how work is done, work expectations, the availability of own resources and facilities, payment systems, and work exclusivity.

The problem of the sham contract also occurs where an employee acting as a contractor is told that their services are no more required, which may cause them to demand recourse to the wrongful termination remedy that employees would usually have been given[4] (Yap, 2018)

The Impact can be determined by way of discussing a case law[5]. An enterprise was fined $100,000 for using an improper triangular structure to circumvent minimum entitlements under the Fair Work Act, and an individual director was further fined $24,000. The beginning point is clear: the sham contract is forbidden by the Fair Work Act. Such that, where the essence of the company and job they do is more compatible for an individual, an "employer" must not misinterpret jobs as an independent contracting agreement.

Employees are authorized to security, including minimum pay and leave entitlements, under the Fair Work Act, or loading to reimburse them for the loss of leaves.ASAP and its single director co-operated with the Fair Work Ombudsman prior to the hearing and returned the underpayment. That did not support them, however. In dismissing considerable fines, the Court observed that "persons should recognize that seeking to circumvent the basic requirements of employment given by the FW Act by creating employees to become independent contractors will have severe negative financial implications."The Ombudsman for Fair Work is gradually tensing its muscles on the provisions of accessorial liability. Persons implicated in breaches shall be cautious[6].

The effectiveness of legal protection can be ascertained by the discussion of various provisions of the Fair Work Act 2009. Sham contracting happens where an employee is employed as an independent contractor where, according to the Fair Work Act and case law, their arrangement with their hirer is genuinely that of employment. Section 357(1) forbids the current or potential employer from claiming 'that the work contract in which the person is or will be hired by the employer is a service contract in which the person works, or may operate, as an independent contractor'.

Section 358 forbids employers from refusing, or threatening to reject, 'a person who is: (a) an employer's employee; (b) perform specialized work for the employer for the reason of re-engaging the individual to perform the identical or related work under a service contract Section 359 forbids the employer from making false statements intended to try and convince the person to accept the contract for services in which the person may do the identical or significantly the identical work for the employer as an independent contractor.' Such sections have all civil remedy clauses which require the court to render orders under Section 545 of the Fair Work Act, including injunctions, restitution and reinstatement orders, and pecuniary penalties under Section 546[7] (Anderson, 2015)

In[8] , As a result of sham-contract and misidentification of workers as independent contractors, fundamental privileges for common Australian workers like superannuation & tax paid deductions are denied to them. There are also implications that "cannot be assessed in monetary terms," illustrating, for example, the fact where "a contractor doesn't have access to sick leave and is more likely to be working if not well."

According to[9]: The establishment of illegal sham contracts agreements is statistically severe. By its own essence, Sham contracting offers a corporation with an undue edge over its competition by unfairly lowering the company's operating costs, rendering it more competitive against its peers, and producing improved business income. Appropriately, penalties should demonstrate the objective severity of this form of action in order to serve as a deterrence to those that might be inclined to commit contraventions.

The seriousness by which benches treat intentional sham contracting was reflected in[10] where the Federal Circuit Court levied the penalty of $161 700. In[11] Employees did not earn extra pay since the employment ceased at 40 hours/ week with their primary employer and the extra time was charged by a labor hire firm owned by the same family at the normal paycheck. The judge found that, in violation of the anti-sham contract regulations, the firms helped and encouraged or were actively involved. In[12], Marshall J The judge defined a clear case of sham contracts as 'nothing more than a cost-cutting operation' & a 'gross misuse of powers as an employer to a helpless, non-union daily casual employee' since the employees would be engaged in the exact job as they had already done under the control and command to the company.

In[13], An inquiry of the company was carried out by the Ombudsman of Fair Work, compelling employees to ratify independent contract arrangements to cut costs. The Court of Federal Magistrates deemed the company to be in contravention of the law on sham contracts and imposed a $280,500.00 fine against the enterprise. The Court went ahead and additionally levied a punishment of $14,000.00 on a former company director for being knowingly informed and complicit in the violation. In addition to the money which the enterprise was ordered to pay the employees in back pay, these fines were extra.

In[14], The Building Inspector of Fair Work undertook an inquiry into the status of 10 traders working as independent contractors on a building site for a period of 3 years. The Court found that the enterprise had intentionally contracted with the employees in sham contract agreements resulting in an underpayment in salaries of about $150,000.00. The Court imposed a fine of around $300,000.00 against the business with the extreme point as a direct consequence of the company's conduct and actions during the prosecution and trials.

The above-mentioned cases underline the severity of the Court's evaluation of violations of sham contractual agreements and of the sanctions it is willing to impose on the employer or the company in violation of those rules.

In light of the above, it can be settled that sham contracting is not ethical in nature as it is against the ethical theories of virtue ethics and deontological ethics. Deontological ethics theory states that there has to be a performance of an act which shall be morally obligatory and virtues ethics theory states about the traits of character which flourish human. The sham contract being against the legal principles is executed by the employer to get away with his duty to pay benefits like leave, pf, superannuation to the contracting party and such act of the employer is neither morally correct and nor the traits of good character is reflected. Such a contract is also forced by the employer to the employee to enter into to also have the tax advantage to the company. The company or the employer avoiding paying the necessary benefits which the employees are entitled to as per the rules and regulations set out by the provisions of Australian Law is a disgraceful act and unethical in nature. From the above discussion of provisions of the Fair Work Act, case laws, and articles it can be concluded that Sham contract is against the interest of the employees resulting in higher penalty levied by the Courts to the infringer of such benefits and by mis-labeling an employment agreement as an independent contract agreement, some companies engaged in sham contracting. They intentionally entered into the sham contract as a tactic to circumvent regulatory duties on employers under the Fair Work Act 2009.

Bibliography for Practical Employment Law


Fair Work Act 2009 (Cth) (FW Act)

Case Laws:

Australian Building and Construction Commissioner v Inner Strength Steel Fixing Pty Ltd - [2012] FCA 499

Fair Work Ombudsman v Australian Sales & Promotions Pty Ltd & Anor [2016] FCCA 2804

 Fair Work Building Industry Inspectorate v Linkhill Pty Ltd (No.9) [2014] FCCA 1124

Fair Work Ombudsman v Eastern Colour Pty Ltd (No 3) [2016] FCA 186

Fair Work Ombudsman v Maclean Bay Pty Ltd (2012) 200. FCR 5

Fair Work Ombudsman v Metro Northern Enterprises Pty Ltd [2013] FCCA 216

Peter Darlaston v Risetop Construction Pty Ltd ACN [2011] 099 767 512

Snook v London and West Riding Investments Ltd [1967] 2 QB 786


Deepanjan Dey, What is sham contract while engaging contract labour? (May 2019)< https://www.businessmanager.in/what-is-sham-contract-while-engaging-contract-labour.php>

Helen Anderson, ‘Fraudulent transactions affecting employees: Some new perspectives on the liability of advisers’ (2015) 39(1) Melbourne University Law Review

Fabian McNeilly, ‘Sham self-employment contracts: taking a liberty’ (2013) 2(15) Manchester Review Law Crime & Ethics 2-3.

Bartier Perry, ‘The high price of sham contracting’ (Dec 2016) <https://www.bartier.com.au/insights/articles/the-high-price-of-sham-contracting/>

Jasmine Yap, Sham contracting (March, 2018) <https://www.aigroup.com.au/resourcecentre/hr/QA-HR/sham-contracting/>

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Law Assignment Help

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