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Sham Contracting. What, Why, How?

Written by Barbara Rebola

22 June 2021

What is “Sham Contracting”?

  • Sham contracting is where a person is treated as an independent contractor by a company it works for, when in fact they are (in reality) an employee.
  • It cuts a lot of costs for the company, including the need to pay award rates, PAYG, Superannuation, Worker’s Compensation insurance, holiday and sick pay. Companies can then submit a very low price to a buying organisation that awards contracts to the lowest bidder, and still make a handsome profit.
  • It’s a criminal offence, and a practice that raises a number of risks for employers and employees

Knowing of a sham contract – a contravention of:

  • Fair Work Act 2009 (Cth)
  • Income Tax Assessment Act 1997 
  • the Modern Slavery Act 2018

Legal Perspective

If employers misclassify employees as independent contractors and pay flat rates that undercut entitlements, they face serious consequences such as court action, hefty back-payment bills and penalties,”

Fair Work Ombudsman Sandra Parker

Sham Contracting and Local Governments

Most common and well-known abuses of Sham Contracting (relevant to you) occur where services are supplied by a mature (ie competitive) industry, such as cleaning services and security services.  It is prevalent in many other industries including: dentistry, chiropractic, construction, IT and support services, electrical, plumbing and more.

Many well-known organisations are currently supporting an illegal business model by engaging cleaning companies who use “sham contract” cleaners.

We recently conducted a desktop review of cleaning or security service contracts issued this year by LGs, and came across at least five LGs that we suspect have awarded contracts/ors that use sham contracting, because their price was the cheapest. The Contractors were not required to disclose how their workers were engaged, and whether they were Independent Contractors or employees. This practice supports the crime.

REAL CASE in Local Government – was this you?

This case demonstrates how a five-minute exercise can alert you to potentially enabling modern slavery.

  • LG Tender for cleaning services in May 2021
    • Conservative 847 hours per month cleaning required
    • Base rate per Cleaners Award $24.36 (assume working during days)
    • Statutory On-costs +$6.12 = $37.88/hour FOR NORMAL HOURS
  • 847 x $37.88 = $32,085/month or $385,000 per annum without overheads or profit.
  • Avg price of tenders was $364,000, this is $20K under the base award and statutory cost, before any overheads, profit or weekend work are taken into consideration!

The winner was an Eastern States company (no advantage being local then!)


Doing it Better

A State Government agency recently wrote a clause in relation to subcontracting (or aka sham contracting in the cleaning industry) into their tender process for cleaning services which saw an 83% DROP in the number of tenderers.

The Supply Chain School is a leader in removing modern slavery. In a recent article, they said that “the Australian Government has outlined some of the key actions organisations can take to reduce the risk of vulnerable workers in their operations and supply chains becoming exposed to modern slavery…”

Application of the Modern Slavery Act (“the Act”) to local government entities

We refer to the principles of the legislation, as opposed to the [currently] non-applicable statutory requirements.

The Modern Slavery Act 2018 requires organisations to submit modern slavery statements. The Act explicitly excludes state and territory governments from the Reporting Requirement. Consistent with this approach, local government entities are not required to comply with the Reporting Requirement.

There are a variety of views regarding this Act in the sector, with some Local Governments getting hung up on the fact that the legislation specifically excludes Local Government from the reporting requirements. Conversely, some other Local Governments are cognisant of the purpose and intent of the legislation and take steps to observe the principles, as recommended by the Federal Government :

Solution – Let’s fix it!

Local governments have an important role to play in combating modern slavery, particularly as they often have significant procurement activities. The ABF encourages local government entities to voluntarily comply with the Act, where they have capacity to do so.

  • Contact us at Procurement Associates, we will:
    • Conduct an audit to identity and propose solutions to ensure compliance to the Modern Slavery Act and blah blajh
    • Assist you to simply adopt human rights due diligence in your supply chain
    • For example Request questions to include in your request documents, please see (insert link to our website with the following statements)
  • Work with Tier 1 suppliers (the businesses you know you know) provides a level of data you can be reasonably sure about
  • It’s the modern slavery risks in the areas you don’t know you don’t know – instances when things have been sub-contracted without your knowledge to achieve a deadline, or procured to meet tight [lowest] cost objectives
    • Adopt a ‘cascade’ approach within your operations and supply chains, pushing awareness of human rights, education about modern slavery, responsiveness to the right procurement procedures.
    • Include clauses in your tender documents to educate, and ensure you weed out the sham contracts including compliance criteria (as done by the MCB above)
    • Evaluate carefully
      • mandate proof during tender process: employees pay slips, bounty for crew assigned to the scope, CVs
      • Pricing must fit within realistic industry guidelines
      • Conduct due diligence by attending reference sites and interviewing workers
      • Beware “bait and switch”
    • Contract Management
      • Audit higher risk contracts yearly; the most likely areas of security and cleaning services
      • Attend worksites and interview workers
      • Ensure they are paid superannuation and get pay slips. Ask to see their latest pay slip
      • Take action on non-compliant suppliers

Additional REsources

A Few Other Resources We’ve Created for Our Customers

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  1. Sue

    Hey Barb, I saw you at the WALGA Procurement Forum this month. Thank you so much for bringing this to our attention. We had NO IDEA our cleaners were sham contracting, and guess what? They were!

  2. Barb Rebola

    So pleased you caught it! Thanks for letting us know too, it always helps.


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