Unfair contracts and sham contracts

Unfair contracts

Under the Independent Contractors Act 2006, an unfair contract is one where a person performs work on terms that are 'unfair' or 'harsh'.

If you're unable to resolve your unfair contract dispute through mediation or negotiation, you may be able to access remedies under the Commonwealth unfair contracts system. To be eligible, you need to be covered by the Independent Contractors Act.

To decide if a contract is unfair or harsh, the courts may consider:

  • the terms of the contract when it was made
  • the relative bargaining strengths of the parties to the contract
  • whether any undue influence or pressure was exerted upon, or any unfair tactics were used against, a party to the contract
  • whether the contract provides total remuneration that is or is likely to be less than that of an employee performing similar work
  • any other matters the courts consider relevant.

How courts decide if a contract is 'unfair' or 'harsh'

A court may consider:

  • the terms of the contract when it was made
  • the terms of a variation to the contract at the time that variation is made
  • the relative bargaining strengths of the parties to the contract
  • whether any undue influence or pressure was exerted upon, or any unfair tactics were used against, a party to the contract
  • whether the contract provides total remuneration that is, or is likely to be, less than that of an employee performing similar work.

Example of an 'unfair' contract

Mary is an elderly cleaner with limited English skills who contracts with Rekall Ltd to clean office buildings. She has never previously been a party to a services contract. In these circumstances, a court may take account of Mary's limited understanding of her contractual obligations when compared with Rekall Ltd's when considering whether the contract is unfair.

What courts can do if it decides a contract is 'unfair' or 'harsh'

A court may order that:

  • the terms of the contract be changed (for example, terms may be added or removed)
  • parts of the contract will have no effect
  • the contract will be 'set aside' (which means the entire contract will no longer have any effect).

In most cases you will not be required to pay the court costs of the other party even if you lose.

No double-dipping

You can't make an unfair contract claim in a federal court if you are also making an unfair contract-like claim under another law such as the Australian Consumer Law.

Sham contracts

A sham contract is when an employer deliberately disguises an employment relationship as an independent contracting arrangement, instead of engaging the worker as an employee. This is usually done to avoid paying employee entitlements such as superannuation, workers' compensation, leave, and certain taxes.

In other cases, employees are pressured to become independent contractors where they are threatened with being dismissed or are misled about the effect of changing their working arrangements.

The Fair Work Act 2009 protects genuine employees from 'sham' independent contracting arrangements and outlines employers' obligations when establishing an employment relationship.

Sham contracting arrangements are illegal.

  • An employer cannot tell an employee that he or she is an independent contractor.
  • An employer cannot dismiss or threaten to dismiss an employee in order to engage them as an independent contractor to do the same (or mostly the same) work they performed as an employee and vice versa.
  • An employer cannot mislead an employee (or former employee) in order to persuade them to perform the same (or mostly the same) work as an independent contractor.

The Fair Work Ombudsman, Fair Work Building and Construction or a union can take action against an employer for behaving like this.

Complain about a sham contracting arrangement

Contracts with minors

Special considerations apply where one of the parties to a contract is a minor (a person under 18 years of age). A contract might not be enforceable against a minor, especially if it includes terms that are unfair to the minor. But the rules are different in each state and territory and you should get advice on the issue if it applies to you.

What to do...

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