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Don't get caught sham contracting... Or you will face the wrath of the LRA!

by , 19 October 2015
With the changes to the Labour Relations Act (LRA), and the possibility of temporary workers becoming your employees, I don't blame you for wanting to 'disguise' them as contractors.

But don't you dare!

If you do, you could land up forking out up to 24 months' salary to an employee you didn't even want or need on your payroll!

And I'm sure you hire contractors to carry out work every day. From secretaries to cleaners, to IT professionals.

But, what are the essential criteria to cover your back? Let's look below...

What is sham contracting?
It's when you treat an employee like an independent contractor but he isn't one. He's actually a temporary employee.You'll land up with fines and having to hire an employee if you:
Misrepresent an employment relationship. In other words, you say it's an independent contractor relationship;
Dismiss or threaten to dismiss an employee to re-hire them as an independent contractor. This is in a job that's the same, or substantially the same; or
Make a false statement to a current or former employee, to influence him to do the same work as an independent contractor.
Employee and contractor: the key differences you need to know about!
If you truly didn't know your relationship was that of employer and employee, not an independent contractor and principal, you can defend yourself. But that gets you nowhere if a court finds you knew about facts that would say you had an employment relationship. Even if the sham contracting wasn't intentional.

The Labour Relations Amendment Act is in effect from 1 April 2015... Are you implementing the changes?
Labour Relations Amendment Act Compliance Toolkit Now that the LRA changes are in effect you need to make sure you're fully compliant, and of course avoid massive lawsuits from employees and fines from the DoL!
What are the Labour Relations Amendment Act changes? Keep reading....

So how do you avoid walking blindfolded into misrepresenting an employment relationship?
These are some of the key indicators the courts would expect a reasonable person to pay attention to:
  • The level of control over the working relationship. Do you control how, where and when a worker does his work?
  • Tax arrangements. Do you deduct PAYE income tax yourself from his remuneration or do you leave it up to him? 
  • How you pay the worker. Let's look at an IT professional as an example. Do you pay him a salary or wage to keep your computer systems ticking over? Or does he come in to do certain tasks for you that he invoices you for?
  • How you supply equipment to the worker. Do you supply the tools and equipment or does he provide and maintain his own significant tools and equipment to do the work?
  • How the relationship looks 'from the outside'. Does the worker act as a representative of your business when he's working, under your own branding and goodwill? Or does he have a separate place of work, create his own goodwill, and advertise his services independently of you?
Just remember though, no single one of these indicators will clearly determine a worker's status. Employers and employees can try arrange their taxes to unlawfully claim an independent contractor relationship. 
And an experienced, specialist worker who you don't need to exercise much control or supervision over will still often be classed as an employee.
If a court examines your contractual arrangement with a worker, it will look at the whole working relationship - not just the written agreements. This includes the substantial terms and conditions on which the worker does his day-to-day job.
That means that you should doing the same. Find out more about fixed-term employment contracts here...

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