Throughout Australia employers in the construction industry have become involved in what is known as ‘Sham Contracting’. As a result the practice, which according to the ABS is growing at an alarming rate, has sparked a government crackdown as studies show it costs taxpayers a staggering $2.45 billion dollars annually.
Sham contracting is a phenomenon which has crept into the construction industry over the last 20 years. Essentially it is a practice used by employers to misrepresent their employees as a client or independent contractor who holds an ABN whilst maintaining an employment relationship with them.
In doing so, this enables the employer to reduce costs by avoiding payment of payroll tax and workers compensation insurance. Furthermore it forfeits the workers right to entitlements such as annual leave, long service leave and superannuation which is a direct violation under the Fair Work Act 2009.
Industry bodies such as the CFMEU (Construction, Forestry, Mining and Energy Union) have expressed their support of the crackdown.
Dave Noonan, CFMEU Construction National Secretary, explained, “Our research shows there are up to 168,000 people employed on sham contracts in construction in Australia, and anecdotal evidence and industry experience sets this figure much higher. ABS data and calculations by independent tax consultants show the practice is costing (Australian taxpayers) $2.45 billion in lost revenue.” Furthermore Noonan explains that unethically, sham contracts force unwilling employees to lose their rights and entitlements.
Despite the obvious ethical issues surrounding sham contracting, housing industry officials are concerned about the crackdown’s repercussions. The Housing Industry Association has warned that SMEs in the building and construction industry will be hit hardest by the investigations.
According to HIA’s ACT and Southern NSW Executive Director, Neil Evans, the inquiry into sham contracting may unfairly impact on genuine small businesses. Evans believes that the crackdown will force subcontractors to become employees and this will devastate the housing industry driving up house prices and negatively impacting employment.
Evans explained “contractors in our industry see themselves as financially fortunate and better off than award-based employees. They do not want the government destroying their business by forcing them to work as employees.”
The Industry and HR Risks
Financial Lines Director of Honan Insurance Group explains.
The Fair Work Ombudsman (FWO) and certainly the unions will be targeting the area of sham contracting in the near future.
The recent decision of Fair Work Ombudsman v Centennial Financial Services  FMCA 459 serves as a reminder of how business owners and employees can leave themselves exposed if they are not keeping up with an evolving compliance framework. The Fair Work Ombudsman (FWO) was successful in securing a finding against the company, the owner and director, but also against the human resource manager who had followed the owners’ and the directors’ instructions. Federal Magistrate Cameron imposed a fine of $3750 against the HR manager for his role in the company’s sham contracting practices determining that by virtue of his position, the HR manger was responsible for ensuring the company complied with relevant workplace relations law, and accordingly was “centrally involved” in the unlawful activity.
This decision demonstrates how individuals will also be personally held to account for sham contracting practices including those who may have been following the instructions of senior management.
HR managers are expected to have knowledge in respect to workplace relations laws and advise their employer of their obligations under these laws. The HR manager in the Centennial matter was found not to have done this and was held personally accountable failing to advise.
Failure to comply with the Fair Work Act 2009 will see offenders slapped with maximum penalties of $6,600 for individuals and $33,000 for a company.
This underlines the issue of corporate accountability and reinforces how responsibility is broadening to essentially anyone who holds themselves in a professional capacity within an organisation. As well as those who are there to provide advice and/or services of a skilful character according to an established discipline.
A Directors & Officers Liability insurance (D&O) policy must be an important consideration of the individuals being prosecuted. Most policies encompass pecuniary or administrative fines or penalties which an executive (i.e. director/officer) or employee is ordered to pay. Fines and penalties cover for the entity is also available via a Statutory Liability Policy.
An unforseen area of exposure may also arise in the form of employment related claims. Last year, the Australian Building and Construction Commission (ABCC) launched a prosecution against a Canberra building company and its directors alleging that the directors called a group of employees into a meeting and essentially told them they would be changed from employees to independent contractors going forward. The ABCC sought maximum penalties of $33,000 against the company and $6,600 against the directors. Under the Fair work Act, an employer must not:
- Proclaim that there is a contractor relationship when an employment relationship exists
- Make false and misleading statements to persuade workers to become an independent contractor rather than an employee
- Terminate an employee only to re-appoint them as an independent contractor.
A breach of employment laws such as these may result in disgruntled workers bringing an action against a business for employment related breaches.
In addition, companies need to be aware that legal liability policies do not generally cover independent contractors and may therefore leave the business exposed to greater liability.
For private companies, public unlisted or not-for-profit organisations the above covers may be available under a package Management Liability Policy. This is a very cost effective way of purchasing insurance. As an idea, companies with revenues of $1,000,000 or under are likely to pay premiums starting at around $1,100 inclusive of charges for a $1,000,000 limit of indemnity.