Avoiding prosecution as an arts employer

The nature of work in the arts mean many people work independently. It’s easy to run foul of the law.

Research by the Fair Work Ombudsman suggests that a number of employers may be breaching laws contained in the Fair Work Act prohibiting “sham contracting”, exposing the organisation to investigation by the Fair Work Ombudsman or the Australian Taxation Office and prosecution in the Federal Courts. If your organisation hires “contractors” you should read on to learn more about sham contracting arrangements.

What is sham contracting?

 A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contracting arrangement, usually for the purpose of avoiding responsibility for employee entitlements. The Fair Work Act makes sham contracting unlawful.

The following hypothetical scenario provides an example of sham contracting:  

Your arts organisation hires a costume designer to make garments for the artists appearing in all public performances held by the organisation. When she is hired, the costume designer was offered a written agreement stating she was an “independent contractor”. However, despite this label:

• The organisation exercises a high degree of control over the manner in which she performs her work;
• The costume designer has an ABN because she was told by the organisation to get one, but she does not provide her work through an incorporated entity;
• The organisation provides all equipment and materials necessary for the costume designer to perform the work;
• The organisation reimburses her for any purchases made in relation to her work;
• The costume designer is prevented from subcontracting or delegating her work to anyone else;
• The costume designer is not free to refuse work allocated to her; and
• The costume designer is not required to generate invoices in order to receive payment from the organisation.

A situation similar to the above involving make-up artists and photographers was recently found to be a breach of sham contracting laws by the Federal Magistrates Court. In that case, a penalty of $17,820 was ordered against the former owner of the business because of his personal involvement in the sham contracting activities, despite the fact that the business had gone into liquidation.

Sham contracting may occur on facts different from those in the above scenario. It is not always deliberate. In some cases, a person might commence as a genuine independent contractor, but over time become so integrated into the employer’s organisation that they end up more like an employee than a contractor.

Sham contracting can lead to investigation and prosecution by the Fair Work Ombudsman or the Australian Taxation Office and legal proceedings in the Federal Court or the Federal Magistrates Court. The maximum penalties under the Fair Work Act for sham arrangements are $6,600 for an individual (such as a director or manager) and $33,000 for a corporation per breach. In addition to penalties, orders can be made for underpayment of wages, annual leave, penalty rates, public holiday rates, unpaid superannuation benefits and other employment type entitlements a worker may have been denied by virtue of the misclassification.

Some tips to avoid sham contracting

When engaging workers, managers, board members or those responsible for recruitment decisions in arts organisations should consider at least the following:

1. Be able to identify the major factors that distinguish an employee from a contractor. Some of the relevant factors include the degree and nature of control exercised by the organisation over the worker; the model of remuneration; responsibility for the provision and maintenance of tools and equipment; the extent of the obligation to work for the organisation, how the worker is represented to the world at large, whether the worker advertises their own services and any capacity of the worker to delegate and subcontract work to others.

2. Simply having an ABN does not make a person an independent contractor. Unfortunately, too many employers rely on inadequate advice, sometimes from accountants, which fails to consider the range of complex factors that are necessary to determine the true status of a worker.  There may be a need to obtain advice from a professional workplace relations expert.

 

When engaging a person as an independent contractor, ask yourself two fundamental questions:
 

1. Will the person be performing the work as an entrepreneur who owns and operates their own business; and
2.  In performing the work, will that person be working in and for that person’s own business as a representative of that business and not as a representative of the organisation receiving the work?

If the answer to both of these questions is no, then the person is likely to be an employee.  To engage them as a contractor may expose you and your organisation to investigation and/or prosecution for sham contracting.

If in doubt, seek professional advice

Regulatory bodies and the courts expect that people who run organisations will have an understanding of how to comply with workplace laws, including laws prohibiting sham contracting.  It is therefore essential that managers and administrators in the arts industry seek professional advice from workplace relations specialists about sham contracting risks, and ensure written agreements are carefully drafted to reflect the true nature of the relationship between the organisation and its workers.

Rigby Cooke Lawyers has advised a number of its clients about avoiding the risks of sham contracting.  Managers or administrators of arts organisations who would like to discuss the issue of sham contracting, or other employment law and workplace relations issues relevant to their organisation, are encouraged to contact Paul O’Halloran, Senior Associate, on 03 9321 7840 or pohalloran@rigbycooke.com.au