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Keeping your payroll compliant: Avoiding sham contracting | Ascender Human Capital Management

Keeping your payroll compliant: Avoiding sham contracting

When it comes to keeping payroll compliant, HR leaders need to ensure the working relationships with their staff is clearly defined and lawful. For example an independent contractor should not be asked to do what’s considered an employee’s job as they won’t receive employee benefits like annual leave or sick leave. In past Fair Work cases, businesses have claimed they were working with an independent contractor when, in the eyes of the law, it should have been an employment relationship. This is called sham contracting. Human Resources Director Magazine (HRD) recently published an article on sham contracting, what it is and why businesses should care. In this blog we’ll learn how to define who is an employee and who is an independent contractor as well as what businesses can do to avoid breaking the law.

The HRD article explains:"Sham contracting is used to describe the deliberate mischaracterisation of an employment relationship (i.e. a relationship between an employer and an employee) as a contractor relationship (i.e. between a principal and independent contractor).The issue for HR professionals is that the worker, who may be receiving a higher hourly rate as a contractor, is not receiving all the entitlements (e.g. annual leave, sick leave, public holidays, superannuation) and job security which they would be entitled to receive if they were an employee of the company."

The article goes on to say that it's unlawful and in breach of the Fair Work Act to:

  • Hire someone as an independent contractor when they really are an employee
  • Fire an employee only to re-engage them as an independent contractor to do the same work they did previously

If a business knowingly entered into a contractor relationship to avoid an employment relationship with a worker – and was found out – the business would have to back-pay entitlements and other liabilities. In addition to that, if it’s proven that the HR representative involved turned a blind eye to this situation, they would also be held liable.

The bottom line is, businesses need to ensure that their working relationships with independent contractors and employees are clearly defined in order for their payroll to remain compliant. If a HR leader is in doubt of the relationship their business has with a worker, they should seek expert advice.

Read the full article on HRD to learn more about sham contracting, liability and factors to consider before determining whether a worker is an employee or independent contractor.

No matter which country or countries you operate in, your payroll must always be compliant. A common occurrence for Multi National Companies (MNCs) that utilise in-house payroll teams is they don’t realise something is non compliant until an employee makes a complaint. Is your payroll team finding it difficult to keep up to date with legislation changes for each country you operate in and other factors that affect payroll compliance? Perhaps Multi Country Payroll Outsourcing (MCPO) could be an option.

To learn more about MCPO, Everest Group Research has produced a free comprehensive white paper, ‘Multi-Country Payroll Outsourcing (MCPO): A Must-check Buffet for MNCs in Asia Pacific’. The white paper provides valuable insight into:

  • Why MCPO is at a tipping point in Asia Pacific and what it means for enterprises there
  • The differences between single and multi-country payroll strategy
  • Challenges enterprises in Asia Pacific face in implementing MCPO and;
  • Specific and detailed steps organisations in Asia Pacific can take to create successful MCPO outcomes