Sham contracting – The facts you need to know

by RP Emery and Associates

With more and more Australian businesses relying on a flexible workforce, protecting genuine employees from sham contracting arrangements has never been more important. But despite a recent crackdown from the Fair Work Ombudsman and Australian Tax Office, many employers continue to feign ignorance as to their responsibilities. Here’s what you need to know about sham contracting – whether you’re an employer or an employee.

What is sham contracting?

Sham contracting occurs when an employer treats an employee as an independent contractor when they’re not. They may require the employee to have an ABN and submit invoices for work done, and often rely on a contractor agreement to formalise the working relationship.

Although some unscrupulous employers institute sham contracting agreements to avoid paying employee entitlements, it’s not always deliberate. But regardless of how the arrangement comes to be, it is illegal.

Under the Fair Work Act 2009, an employer must not:

  • Claim an employee is an independent contractor when they’re not
  • Make false statements to convince an employee to become an independent contractor
  • Dismiss, or threaten to dismiss an employee for failing to agree to become an independent contractor
  • Dismiss an employee and then re-hire them as an independent contractor to do the same work

But how do you know who’s an employee and who’s an independent contractor?

Independent contractors vs employees

There are a number of factors that set employees apart from independent contractors. These include:



Independent contractors

Work standard or set hours each week (casual employees’ hours may vary from week to week)

Are engaged for a specific task, and decide how many hours are required to complete it

Perform work under the direction and control of their employer

Have a high level of control over how the work is done, and may hire others to assist

Have an ongoing expectation of work

Are engaged to complete a specific task or for a specific period of time

Bear no financial risk and are covered by their employer’s insurance

Bear the risk of profit or loss on each job. They also usually assume responsibility and liability for poor work or injuries sustained while completing the task, and therefore have their own insurance

Are entitled to superannuation contributions paid by their employer into a nominated fund

Pay their own superannuation (as a general rule)

Are provided with tools and equipment, or a tools allowance by their employer

Provide their own tools and equipment

Have income tax deducted from their pay by their employer

Pay their own tax and GST (as a general rule)

Are paid a regular income (weekly, fortnightly or monthly)

Have an ABN and submit invoices for work done or are paid at the end of the project

Are entitled to paid leave – annual leave, sick leave, long service leave etc, or if a casual employee, receive loading in lieu of leave entitlements

Are not entitled to paid leave


It’s important to note there’s no single factor that determines someone as an employee or independent contractor. An employee can have an ABN and invoice for work done and still be an employee, while an independent contractor may carry out the same work as an employee. To make the right distinction, you should look at all the above factors in combination.

Minimum entitlements and general protections

Because of their independent nature, independent contractors aren’t entitled to the same benefits as employees. However, they can negotiate things like leave and notice of termination in their contracting agreement.

This doesn’t mean they’re without protection though.

Under the Fair Work Act 2009 independent contractors and their principals are afforded limited workplace rights and are protected from adverse action, coercion and abuse of freedom of association – i.e. their right to engage, or not engage, in industrial activities.

They can also ask a court to set aside a contract if it’s found to be harsh or unfair under the Independent Contractors Act 2006.

Both employees and independent contractors may approach the Fair Work Ombudsman for assistance if they feel their rights have been contravened.


Because sham contracting can result in employees being denied their workplace rights and entitlements, non-compliance is taken very seriously. Penalties include, but are not limited to a maximum penalty of $51,000 per contravention (as at the time of writing) and compensation payments to employees suffering any loss.

Fair Work Inspectors may also apply to the courts for injunctions or interim injunctions if an employer attempts (or threatens) to dismiss an employee with the intention of re-hiring them as an independent contractor. An injunction in these circumstances would prevent the dismissal from occurring, or remedy the effects of the original action (the attempted or threatened firing).

The courts may also make other orders to have the employee reinstated or compensated.

Protecting workers’ rights

Whether you’re an employer, employee or independent contractor, and are confused about workers’ rights and entitlements, you can contact the Fair Work Ombudsman for assistance. You can also visit their website to access fact sheets and further information.

If you’re unsure if you’re an employee or independent contractor, visit ( or seek legal advice.

As an employer, it’s important you remember that ignorance of the law is no defence. Even if you’ve mistakenly distinguished someone as an independent contractor when they’re not, you may still be subject to penalties under the law. If you’re unsure of how to distinguish between employees and independent contractors, you should seek legal advice.

Ian Macleod is the CEO of the legal publisher RP Emery and Associates. They provide cost effective legal contract kits for Individuals, SME’s and the legal fraternity.




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