Are you Sham Contracting?

Or maybe you are procuring services provided by sham contractors.

Either way, you are in breach of the Fair Work Act and potentially the Modern Slavery legislation. Who knew?

Well, not many people as it happens.

Those competing for work through tendering/quoting systems know, however, when they lose to an impossibly low bid, and they can't see how the work can be provided at that price point. They find themselves being outbid, again and again. As one of my cleaning company clients said to me "I can't compete, Sue, unless I operate in the same way. The prices that are being offered aren't possible otherwise".

So while the procurement people internally report great savings obtained through the tendering process, they are (potentially) unknowingly supporting an illegal business model.

As usual the Feds and NSW have lead the way to shining the spotlight on this business model. They are now asking bidders to prove they are compliant with the legislation, seeking evidence of the award that is used. I now also increasingly see these questions being asked as part of the compliance criterion across the rest of the country.

The way slimy operators dodge this request is to supply the correct information relating to the people they employ (usually the core team) and lie about the independent contractors they use in the delivery of the work.

There is a thin line between "independent contractor" and "sham contractor". Independent contractor has a genuine contract to supply work under a written set of terms and conditions, and is motivated to make a profit because they actually operate a small business. They can supply their services to others, are generally motivated to pass the ATO's personal services test to get the best tax breaks. They cover their own superannuation, leave allowances, insurances etc.

A "sham contractor", on the other hand, is the result of a tactic used by employers to dodge having to pay leave, payroll tax, superannuation, worker's compensation, uniforms, vehicles, meal allowances, etc. A typical scenario is the worker is asked (or offers) to obtain an ABN. They are paid a fixed hourly rate, and are either paid on an recipient created tax invoice, or they invoice the company. All the above expenses are their responsibility, and they need to pay it out of their invoiced payments.

One of the many acid tests lie in the conditions under which the worker works. If they are directed by the company, work regular hours, represent themselves as part of the company, then they may indeed actually be an employee, regardless of the instrument under which they are paid. This means that they are entitled to their statutory rights, and can claim back pay for all their entitlements. If the matter falls under Fair Work's gaze, there may also be penalties to pay.

One of my clients told me in his industry the biggest problem group was international students. They arrive, get a student visa to work 20 hours, and then apply for an ABN to work as a sham contractor for whatever else they can get. When they return to their country, their income tax remains unpaid. Tax avoidance due to sham contractors is on the ATO's radar, and they are also able to apply penalties to companies.

Are you an independent contractor? Maybe you are happy with your arrangement. But, just of the heck of it, take a look at what you should be paid, compare it to what you are actually getting. Do you have your own worker's compensation and public liability insurance? Professional indemnity? Do you pay yourself holiday pay and superannuation? Do you claim your "business expenses" on your tax?

Are you in procurement and do you procure works and services? Just for the heck of it, check out what the workers should be paid in accordance with the modern award. No modern award? Use the minimum wage as the starting point. Incorporate all the extras, such as penalty rates and additional allowances. Add on the various leave allowances. Consider the cost of overheads and add them too. Then, for goodness sake, allow the contractor a decent profit so they have something to reinvest into the business. Now compare that figure to the rates you are offered.

Our employment laws exist for a reason. Check out Fair Work's website for more information.

#tendering #sham contracting #freelancers #tender writers #procurement