Contractors and Sham Arrangements – Why you need to be careful.

October, 2014

Do you engage workers as “ABN” contractors? If so, ask yourself this question: are these people really contractors, or are they your company’s employees? Clearly if such a worker is an employee, the company engaging them may have a liability for all manner of employee entitlements.

If the company engaged the workers knowingly or recklessly representing that they were contractors instead of employees, it may face hefty penalties under the Fair Work Act.

And what if an employee is dismissed in order to be re-engaged as an independent contractor doing the same or substantially the same work?

In the recent Federal Circuit Court decision in The Director of the Fair Work Building Inspectorate v. Robko Construction Pty. Limited & Anor, it was alleged that Robko dismissed an employee, Simmons, failing to give her notice or payment in lieu and then re-engaging her as a contractor doing the same or substantially the same work.

In response, Robko claimed that Simmons was engaged as a daily hire employee within the meaning of the relevant Modern Award, and was therefore paid only one day’s wage in lieu of notice (as the award required). Alternatively, it argued that Simmons was summarily dismissed for serious misconduct.

It was found that Simmons accepted work on a full time basis working as an excavator operator. Over time, work slowed, and Simmons was directed to take some of her accrued annual leave. When she asked for other duties, Simmons was told that there were none.

Later, Simmons was presented with a letter indicating that Robko did not have sufficient work for her, but advising that she could continue to be engaged by it, if she acquired an “ … ABN or [was engaged] preferably as an incorporated Company.” Simmons was advised that if she did not agree to be engaged as a subcontractor, she would be dismissed.

Simmons rejected the offer and was told that her employment would be terminated on one day’s notice.

Although Robko later claimed that it asked Simmons to undertake alternate work, and that she refused, this was not accepted by the court.

Judge Simpson found that Robko and one of its directors had been responsible for four contraventions of the Fair Work Act associated with terminating Simmons’ employment and seeking to re-engage her as contractor, and in not providing appropriate notice (or payment in lieu).

The matter has been adjourned to determine what penalty and compensatory orders will be made.


This case serves as a timely reminder that care must be taken in the engagement of workers, lest a business might be required to pay substantial penalties. Not only should employees not be dismissed to be re-engaged as contractors doing the same (or substantially the same) work, but if the true nature of the arrangement is one of employer and employee, then the worker should be engaged on that basis. Merely having a worker carry an ABN, or indeed work through an incorporated entity, may not be enough.

Contact Mills Oakley

For more information, please contact:

Ross Levin | Partner
T: +61 3 9605 0070

Malcolm Davis | Partner
T: +61 2 8035 7932

Adam Lunn | Partner
T: +61 3 9605 0868

Lisa Anaf | Partner
T: +61 3 9605 0857

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