Sham contracts

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sham contracts

What’s the difference between a contractor and an employee? Understanding this will prevent you from setting up a sham contract. By Kerryn Ramsey

While work flexibility continues to expand in the dental profession, it’s important for practice owners to understand the different contracts and engagements. Without a little due diligence, an employer may set up a sham contracting arrangement without realising. Both practice owner and employee need to understand this issue, particularly when a graduate is taking up a first paid position.

Understanding a sham contract

A sham contracting arrangement takes place when an employee is told they are an independent contractor when they’re not. This is usually done to avoid certain taxes and responsibility for employee entitlements, which includes financial benefits and employment protections.

The Fair Work Ombudsman outlines that under the sham contracting provisions of the Fair Work Act, an employer cannot: 

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  • misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement;
  • dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor;
  • l make a knowingly false statement to persuade or influence an employee to become an independent contractor.

“Whether a worker is an employee or contractor,” says an Australian Taxation Office spokesperson, “is not a matter of choice, but depends entirely on the working arrangement and the specific terms and conditions.”

According to Adele Granata, senior workplace relations consultant of the Australian Dental Association (ADA), in many cases, the practice owner is not attempting to avoid employee entitlements or legal obligations. “In a lot of cases, it’s just a misunderstanding of the law,” she explains.

Recently, sham contract schemes have incurred penalties for large companies in Australia. This includes Easttrac Pty Ltd and Klemtrac Pty Ltd, a labour-hire company in Adelaide that was penalised more than $200,000 last January. The Fair Work Ombudsman referred to this case as an example of a tough stance on sham contracting with serious consequences of underpayment of workers.

Get the contract right

To prevent setting up a sham contract, practice owners now employing or engaging graduate or associate dentists for two or three days a week need to put together contractual arrangements that comply with the full measure of the law. Another problem area is when a practice engages a specialist to consult and operate. The key, says ADA’s Granata, is that the practice owner needs to be aware of the difference between a casual employee and a contractor. “A casual employee doesn’t have the same kind of leave entitlements or paid annual leave as a full-time employee,” she says, “but since they are still an employee, they have an employment relationship which attracts other kinds of rights and protections.” 

Unlike a casual position, an independent contracting model doesn’t have an employment relationship. It’s here that sham contracting can apply if “an employer attempts to disguise an employment relationship as an independent contracting arrangement”, says the Fair Work ombudsman.

“You can call something an independent contractor agreement but if it’s actually an employment engagement, the courts treat it as such.”

Adele Granata, senior workplace relations consultant, ADA

Granata explains: “It means there are no leave entitlements and there are no protections from unfair dismissal. It’s a more flexible model; there’s no structure in terms of remuneration or how the services are paid. An independent contractor has more flexibility, autonomy and control over their own services.”

An example is a dentist who has the ability to set their own hours and methods of work. “This contractor also has the ability to say, ‘Well, I’m going on a holiday now and will not provide my services for a couple of weeks.’ Whereas, a graduate dentist, who needs a greater level of supervision and control, aligns with an employment relationship.”

Service facility agreement 

A Victorian dentist, who has specialists visiting the practice, says that rather than setting up regular contracts, these dentists work under a service facility agreement. Here, the practice owner collects the fees on behalf of the clinician and charges them to use the facility. “The fee they pay is based on a percentage of the total fees collected less any particular specific costs of sales, such as laboratory,” he says.

“These practitioners do sessions at different clinics, at different times, on different days. They pay to use the facility to see patients who need their particular skills.”

Terms of agreement

When hiring an employee or engaging with a contractor, it’s essential to have written terms of agreement explaining the relationship. In addition, the contract needs to be worded correctly. “You can call something an independent contractor agreement but if it’s actually an employment engagement, the courts treat it as such,” says Granata.

The ATO works with both industry associations and businesses to clarify whether a worker should be classified as an employee or contractor for tax and superannuation purposes based on the working arrangements that are in place.

According to the ATO spokesperson: “When we find a business has incorrectly engaged a worker as a contractor rather than an employee, we work with the business to make sure they understand their employer obligations and transition to the correct arrangement as easily as possible.”

Dealing with a dispute

When assessing any contract, be conscious of all elements an employer should provide under the Fair Work Act 2009. If it is found they have knowingly engaged in a sham contract, there are civil penalties and fines that apply. 

According to the Melbourne dentist, it’s important to talk to an accountant in the early stages. “I have the security of using a type of facility which has been used as a precedent by the Independent Dentist Network (IDN),” he says. “I know of several IDN dentists who use this service—they’ve done all the precedent checkings—and I can rely on them.”

Overall, there are various opportunities for genuine contracting arrangements and service facility agreement—just make sure it’s right for all concerned parties.  


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