Employment Law
Sham Contracting: Contractor vs Employee Risks
Getting the contractor vs employee distinction wrong is one of the most expensive mistakes an Australian employer can make. Sham contracting attracts penalties of up to $469,500 per contravention and can result in back-payment of entitlements, superannuation, and workers compensation premiums.
What the Law Says
The Fair Work Act 2009, Part 3-1 Division 6 makes it unlawful for an employer to misrepresent an employment relationship as an independent contracting arrangement. Key provisions include Sections 357-359 covering sham arrangements, reckless misrepresentation, and dismissal to engage as contractor.
What Employers Must Do
Assess the true nature of the relationship
Apply the multi-factor test: control, integration, economic dependence, tools/equipment, ability to delegate, and financial risk.
Document the arrangement properly
Use a written contractor agreement that reflects the genuine nature of the arrangement.
Monitor for drift
Relationships can evolve over time. Regularly reassess whether the arrangement still reflects independent contracting.
Seek professional advice
If you are unsure, get expert advice before engaging someone as a contractor. The cost of advice is far less than the cost of getting it wrong.
Common Mistakes and How to Avoid Them
Mistake: Labelling employees as contractors to avoid entitlements
Fix: The label does not determine the relationship. Courts and the ATO look at the substance of the arrangement, not the contract title.
Mistake: Having only one client as a contractor
Fix: Economic dependence on a single client is a strong indicator of employment. Genuine contractors typically have multiple clients.
Mistake: Controlling how the work is done
Fix: If you direct when, where, and how the work is performed, the worker is likely an employee regardless of the contract.
Penalties and Consequences
Sham contracting penalties are severe:
- $93,900 per contravention for individuals
- $469,500 per contravention for companies
- Plus back-payment of all entitlements, superannuation, PAYG tax, workers compensation premiums, and payroll tax
When to Get Professional Help
Jordan Firme Business Consultants helps employers audit their contractor arrangements and restructure relationships where needed to ensure compliance.
Frequently Asked Questions
Apply the multi-factor test considering control, integration, economic dependence, tools and equipment, ability to delegate and sub-contract, hours of work, and financial risk. No single factor is determinative — it is the overall picture that matters.
Yes. The ATO regularly audits contractor arrangements and can reclassify workers as employees, resulting in back-payment of PAYG withholding, superannuation guarantee charges, and penalties.
The Closing Loopholes amendments returned the definition of employment to a multi-factor test that considers the real substance of the relationship, not just the written contract terms. This overturned recent High Court decisions that focused primarily on the contract.
Up to $93,900 per contravention for individuals and $469,500 per contravention for companies, plus back-payment of all employment entitlements, superannuation, and tax.
Yes. Even if the arrangement starts as genuine contracting, it can evolve into employment if the nature of the relationship changes. Regular reviews are essential.
Concerned About Your Contractor Arrangements?
Our HR consultants can audit your contractor arrangements and ensure they are legally compliant.
Book a Consultation