Does a written subcontract protect you from “sham contracting”?

Have you ever wondered whether a written subcontract can protect you from "sham contracting"?

Many of my clients are family businesses in the construction industry. They’ve been around for decades. Their success is grounded in their relationships, where trust outweighs legal?jargon. They may have been working with the same subcontractors for as long as they’ve been in business… since back when a handshake was worth much more than signing on a dotted line.

For a long time that was good enough. But lately, I have been recommending to those businesses that the time has come to introduce written subcontracts to their workforce.

Sham contracting: what is it and why should you care?

In recent years, the ATO and the Fair Work Commission have been on the lookout for "sham contracting". Sham contracting is when an employer disguises an employment relationship as a contractor relationship, either deliberately or by recklessly not paying attention. A contractor relationship is sometimes seen as preferable because it is easier to terminate, and because there is?no?requirement to pay superannuation or leave entitlements. And employees like the higher contractor rates. But of course, it is human nature to spend the difference rather than diligently sinking it into super or putting it aside for a rainy day.

Small businesses have been fearful that the ATO would come knocking one day with an order to pay out superannuation and leave entitlements for contractors, saying that they were actually employees.

In my experience, most employers want to do the right thing. They aren’t going around dodging their responsibilities as employers. So how can they protect themselves?

Employee or contractor?

Working out the true nature of these relationships can be tricky. Courts have historically applied a "multi-factorial" test, which considered a lot of different characteristics of the working relationship. In recent years, Australian Courts emphasised that they would always look at the true substance of the relationship rather than whatever was written in the contract.

What do recent court cases say about this?

Earlier this year, the High Court revisited this issue in two cases (Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1?and?ZG Operations v Jamsek [2022] HCA 2). While the High Court still focused on the substance of the relationships, the judgements made it clear that written contracts carry a lot of weight in determining whether a worker is an employee or a contractor. The conduct and actions of the parties after the contract has been signed is less important. This is particularly true if the contract comprehensively captures the?terms?of the engagement.

Key takeaway: You need written subcontracts

If your business model relies on subcontractors (e.g., you use a lot of trade contractors to deliver the projects that you take on), you should:

• make sure that the relationship is captured in an up-to-date written subcontract, especially if the subcontractor works mainly or only for you;?
• include all of the?terms?of the relationship in the subcontract, including that:
• the subcontractor is running a business enterprise and must carry the cost of doing so (e.g., by carrying insurance and supplying all tools and materials required for their work);
• the subcontract can only be varied by written agreement;
• the subcontractor is not guaranteed any minimum amount of work and has control over accepting the work and how, when and where it will be performed; and
• the subcontractor is responsible for all of its employees’ entitlements; and
• require your subcontractors to be a company incorporated under the?Corporations Act 2001?(Cth) (i.e., a pty ltd).

As well as avoiding any suggestion of sham contracting, written subcontracts can help to limit your liability for workers compensation claims from your subcontractors.

How can SoundLegal help?

Hit reply and tell us if you’ve laid awake at night wondering whether the ATO might turn up at your door and ask to see your subcontracts one day. We’d be happy to help you sleep easy, by drafting new subcontracts or updating your existing paperwork.

I’ll be delivering the "Contract – Planning & Procurement" workshop at AIMWA on 7 and 8 July 2022. You can register online at AIMWA?here. If this course interests you, get in now, as it won’t be on again until November 2022.

From Gemma and the SoundLegal Team

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