26 November 2018

Sham contracts aren’t always obvious – here’s how to spot one

KnowCents Medicolegal

If a person calls a duck a rooster, it’s still a duck. If 20 people gather by the pond, nod in agreement and call the duck a rooster, it remains a duck. 

This was the High Court analogy about sham contracts; when a service provider is characterised as something they’re not. 

Unfortunately, many doctors in Australia are being called (and treated as) contractors, when in truth, they’re employees.

This “sham contracting” results in individual doctors being underpaid, while their employers risk owing large sums of money in entitlements. 

SHAM CONTRACTS SPOTTED 

Food delivery service Foodora recently came under fire for asking its delivery drivers to sign independent contractor agreements while effectively acting as employees, which didn’t please the Fair Work ombudsman.

Similarly, cleaning company Joonie was heavily penalised for hiring an “independent contractor” (requesting an ABN and invoices) while dictating all other aspects of his work, including hours, the type of work to be completed, and uniform, which is clear “employee” territory. 

THE RAMIFICATIONS 

Fair Work legislation prevents this misrepresentation, with a single breach attracting penalties of up to $54,000. On top of this, the employer may be at risk of superannuation payments, workers’ compensation, PAYG tax, leave entitlements and minimum wage miscalculations (including overtime payments). 

This can be an expensive exercise, as ACE Insurance Ltd learned the hard way. In 2013,  the company paid more than $500,000 in lost entitlements after incorrectly categorising five employees as contractors.

For employers in the “gig” economy, or those that adopt the “contractor” business model, this can be a very risky business model. Many have conjectured that the Federal Court action against Foodora is one of the reasons the food delivery company has decided to close its Australian operations. 

DEFINING EMPLOYMENT RELATIONSHIPS

The Australian GP profession isn’t immune to this practice, with many doctors commonly engaged as independent contractors when they should more properly be characterised as employees. 

So, how can you determine the true nature of a working relationship? 

There are two key considerations:

1. Control: How much control does the principal have? It’s different for employees versus contractors. For example, an employee takes direction from their employer in the manner and type of work they do (e.g. note-taking, care planning, clinical audits, hours worked), and cannot refuse lawful and reasonable direction. On the other hand, a contractor has control and discretion over the work to be performed, agreeing to tasks beforehand in accordance with their contract.

2. Integration: Is the worker independent from the organisation? For example, an employee may have an employer-issued business card and use employer-issued equipment (e.g. auroscope, ECG, computer), whereas a contractor will have their own business card and equipment, without a position or office within the principal’s organisation.

Note: No one indicia can define an employment relationship, and classification depends on multiple factors and the specific factual circumstances.

THREE TIPS TO MINIMISE RISK

Regardless of what side of the contract you sit on, it pays to protect yourself and/or your service providers against the consequences of sham contracts, starting with these three tips: 

1. Where possible, engage with a company (rather than an individual) for the provision of services, keeping the relationship “at arm’s length”. (Having an ABN and issuing tax invoices is not enough.)

2. A principal is required to pay superannuation a contractor who earns more than $450 in any month – regardless of whether the individual is characterised as a contractor. Principals may also incur payroll tax if total employee salaries exceed $850,000 per annum.

3. Create a crystal-clear agreement that states which party is responsible for paying superannuation, workers’ compensation and PAYG and which party is responsible for setting work hours, paying expenses, supplying the equipment and tools necessary to perform the work and bearing the risk for the work performed.

Sidestepping sham contracts starts with a little awareness and a lot of respect for lawful definitions. 

In doing so, you’ll avoid heavy penalties and professional frustrations – and never confuse a duck with a rooster again.

My-Linh Dang is managing director at Metis Law, business savvy legal experts specialising in business contracts, capital raising, mergers & acquisitions and privacy. ([email protected]). Dr Kevin Cheng and Dr Andrew Robertson are GPs and directors of Osana
(www.osana.care)

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9 Comments on "Sham contracts aren’t always obvious – here’s how to spot one"

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Bob
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Bob
15 days 22 hours ago

Similarly to Oliver Frank, below. Is there a ATO ruling regarding the Superannuation payment for a contractor who’s earing more than $450 per month? I know someone who’s been a contractor for 5 years without being paid Super by the Principal.

Neil Donovan
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Neil Donovan
16 days 4 hours ago

I agree, I dont understand.
Point 2 : Principal pays super to contractor .
Point 3. Have crystal clear agreement , outlining who pays Super?
My pulse just popped up 9% and is staying there..
Please clarify?

Anchita Karmakar
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Anchita Karmakar
16 days 8 hours ago

Class action brewing….

Oliver Frank
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Oliver Frank
16 days 9 hours ago

You say: “A principal is required to pay superannuation a contractor who earns more than $450 in any month – regardless of whether the individual is characterised as a contractor.” This is the first time that I have seen this. Are you sure about this?

My-Linh Dang
Guest
14 days 5 hours ago

Oliver Frank, this is correct – where the contractor is an individual and what the principal is paying for is mostly labour provided by the contractor (which will be the case for GPs).

Where the principal is engaging a contractor that is a company or trust, then the principal is not required to pay superannuation to the company or trust (because a company or trust cannot be an employee).

The ATO has a lot of helpful information on their website. Or speak to friendly professional.

Lou Lewis
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Lou Lewis
16 days 42 minutes ago

Oliver,
I just checked on the canstar.com.au and the statement “A principal is required to pay superannuation a contractor who earns more than $450 in any month – regardless of whether the individual is characterised as a contractor” is correct.
It also surprised me ,thats why I checked it and found it to be the case.
Cheers
Lou

Marcus Wilson
Guest
16 days 9 minutes ago
If you own a practice, do not go thinking you have to pay super for the GPs working independently at your clinics, NO MATTER HOW MUCH THEY EARN. Unless they are registrars, then in the vast majority of cases, these GPs bill patients (or Medicare on the patients’ behalf) under their own Medicare Provider Number, and certainly in their name (or their private entity’s name). The GPs pay you a service fee, essentially a rental stream for using your facilities. They are NOT under contract to provide services to you as a practice owner – and they sure as hell… Read more »
My-Linh Dang
Guest
14 days 5 hours ago
Every situation will depend upon the specific facts and consideration of the totality of the relationship – including the 2 key issues of “control” and “integration”. The fact that your clinic structures the arrangement so that the clinic is actually providing services to the GP is not dissimilar to the argument that gig economies such as Foodora, Uber and Airtasker would run: i.e. they provide a “platform” for the workers to connect with people who want their services. In the case of a clinic, if the GP works under the clinic’s “brand” and GPs cannot turn down work when it… Read more »
Victor Shawpan
Guest
16 days 3 hours ago

Same here. Ive never heard of this. I doubt many will have as well.

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