Now more than ever before it’s important to recognise the difference between an employee and a contractor with both the ATO and Fair Work Australia targeting the employment relationship and sham contracts. A sham contract refers to the situation where an employer hires an employee through an independent contracting arrangement, instead of engaging the worker as an employee.
This has been a common practice in the nanny industry, however it doesn’t necessarily make it the correct process. To check if you are hiring your nanny through a sham contract, try the ATO online employee test.
Parents should be careful to avoid sham contracting. Just because your nanny has an ABN or invoices for payment doesn’t automatically mean they are an independent contractor. Calling someone an independent contractor or getting them to sign a contract saying they’re an independent contractor doesn’t automatically make them one either.
The problem lies in as a contractor, your nanny is missing out on entitlements laid out by the National Employment Standards.
Intentionally or unintentionally misclassifying your nanny as a contractor, could be deemed as a sham contract and found unlawful.
Sham contracting horror story
Source: Fair Work Australia
This recent decision is one example of how courts look at the issue of sham contracting.
On January 29 2013, the full Federal Court found that 5 insurance sales representatives were employees even though they signed contracts that said they were independent contractors.
In the appeal, Justice Robert Buchanan supported the original decision in favour of the former employees. He said that the business had control over how their work was organised and over the allocation of agents to sales teams. Based on this, he found that they were employees, not contractors.
As a result of this decision, the former employees were entitled to more than $500,000 in unpaid accrued annual and long service leave.
Justice Buchanan said there was close control over the organisation of work and allocation of agents to sales teams.
“They [the employees] had no real independence of action or true independence of organisation,” his Honour pointed out, noting that they “worked under close direction, supervision and organisation.”
Another important factor in the Full Federal Court’s decision was that the sales representatives had to carry out the work themselves and didn’t have the option to delegate the work to someone else.