So-called sham contracting arrangements – essentially where (usually young) employees are classified as independent contractors instead of employees – have been subject to ATO attention for some time.
The ATO has a concern that, when times are tough, businesses may be tempted to cut corners to stay afloat or prop up their cashflow. This is especially relevant when it comes to employer obligations.
The ATO’s strategy for tackling non-compliance in this area focuses on businesses that do not withhold from payments to workers as required and fail to make superannuation guarantee contributions. This can be through deliberate and straightforward non-compliance by payment of cash wages and can also involve using an ABN to mask underlying employment relationships.
Some contemporary employment arrangements have characteristics of both employment and business. In these cases, particularly in times of higher unemployment, the ATO view is that it is often the employer who decides whether to treat the worker as a contractor or employee.
The ATO says it seems that many employers preferred to treat workers as contractors as it enables them to cut costs in terms of workers compensation, payroll tax and superannuation guarantee. They can also negotiate pay rates outside of normal wages and conditions, and do not withhold tax. While some commentators, mostly unions, argue that these arrangements are ‘bogus’, the ATO says that some may well be legitimate under current law.
The Tax Commissioner has indicated that the ATO is particularly concerned at non-compliance at two levels, ie. employers not complying with their PAYG and super guarantee responsibilities and also instances of contractors not returning income. He said the ATO regards sham contracting as a tax compliance risk issue and that, following the receipt of more funds from the Government, the ATO had allocated some additional 66 staff into that area of scrutiny.
In an effort to help businesses, the Tax Office has developed an online decision support system to assist businesses in making the correct decision as to whether a worker should be treated as an employee or contractor for tax and superannuation purposes. This is a useful guide.
On a related (but not exactly the same) theme, Fair Work Ombudsman Nicholas Wilson has warned that sham contracting arrangements are being touted across Australia in a range of industries and organisations and their managers who take the offers up could be held to account.
The Ombudsman said that documents lodged in the Federal Court in Adelaide allege that three 15-year-olds were hired on behalf of the labour-contracting companies, which classified them as “independent contractors” and paid them according to contract rates. He said it is alleged the arrangement was a breach of the sham contracting provisions of workplace laws because teenagers were entitled to be classified as employees and receive the minimum hourly rates and penalty rates payable to casual retail food assistants.
“These teenagers were working at a fast food shop after school to earn a bit of pocket money,” Wilson said. “We allege they should have been classified as employees and not as self-employed independent contractors,” he said.
Wilson said his office had come across sham contracting arrangements in areas including construction, security officers, receptionists and cleaners. “Now, by no stretch of the imagination can you call a single cleaner an independent contractor and a proper-functioning and self-fulfilling business – they are simply not,” Wilson told conference delegates.
Wilson said his office had been sent copies of offers being sent to companies to provide services in these areas and dramatically reduce costs including workers’ compensation, OHS and other charges. He cited one that specifically promised to side-step the client’s regulatory concerns and any involvement with the Fair Work Ombudsman. “How wrong they were,” he said.
Wilson said that, under s 550 of the Fair Work Act, any individual involved in sham contracting could be personally held to account. He referred to an alleged sham contracting case which is currently before the Federal Court. The Fair Work Ombudsman claims the fast food shop in question employed three teenagers as independent contractors through two different labour hire firms when they should have been employed as casual retail assistants.
He acknowledged the sham contracting issue was “complex”. “But it is one which certainly we need to start saying to our market that there is a group of contractors which if they’re not sham, they’re bogus and if they’re not bogus then they certainly involve underpayments and so use them at your peril,” he said.
It is understood that the Australian Building and Construction Commission intends to host a government and industry roundtable in eliminating sham contracting in the building and construction industry. The Tax Commissioner indicated the ATO would be prepared to take part in the roundtable.
SMEs need to be cautious when employing contractors. Make sure all relevant laws are correctly complied with. It’s not just the ATO closely watching this area, the Fair Work Ombudsman is watching too.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions . 
For more Terry Hayes features, click here.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
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