ATO and Fair Work Increase Focus on Sham Contracting: What Businesses Need to Know
Recent announcements from the Australian Taxation Office (ATO) and the Fair Work Ombudsman (FWO) confirm that regulators are increasing their focus on sham contracting.
For businesses that engage independent contractors, this is an important reminder to review contractor arrangements and ensure workers are correctly classified.
Misclassifying a worker as a contractor when they are actually an employee can expose businesses to significant legal, financial and reputational risks.
What is sham contracting?
Sham contracting occurs when a business incorrectly represents an employment relationship as an independent contracting arrangement.
This can happen when a worker is engaged as a contractor even though the nature of the working relationship is more consistent with employment.
In some cases, businesses may intentionally do this to avoid paying employee entitlements such as:
Superannuation
Annual leave and personal leave
Workers compensation
Notice of termination
Other employee benefits
However, sham contracting can also occur unintentionally when businesses misunderstand the legal distinction between employees and contractors.
Under the Fair Work Act, sham contracting is unlawful.
Why regulators are increasing enforcement
The ATO and Fair Work Ombudsman have indicated that they are increasing their focus on contractor arrangements across Australian workplaces.
This increased attention reflects ongoing concerns that some businesses may be incorrectly engaging workers as contractors when they should be classified as employees.
Correct worker classification is critical because it affects:
Tax obligations
Superannuation obligations
Workplace entitlements
Workplace protections
Where regulators identify non-compliance, businesses may face penalties, back payments and enforcement action.
Contractor vs Employee: Why the Difference Matters
One of the most common misconceptions is that a worker is automatically a contractor if they:
Have an Australian Business Number (ABN)
Issue invoices for their work
Have signed a contractor agreement
While these factors may form part of a contracting arrangement, they do not determine the true nature of the working relationship.
Courts and regulators look at the overall relationship between the parties to determine whether someone is genuinely operating their own business or working as an employee.
Understanding the difference between employees and contractors is critical for businesses because the classification determines legal obligations such as superannuation, tax reporting and workplace entitlements.
Factors that determine the true relationship
When determining whether a worker is an employee or a contractor, several factors may be considered.
Control over how work is performed
Employees are typically directed by their employer regarding how, when and where work is performed. Contractors generally have greater independence in how they complete the work.
Ability to subcontract or delegate work
Contractors operating their own business often have the ability to subcontract or delegate work to others. Employees usually perform the work personally.
Provision of tools and equipment
Contractors typically provide their own tools, equipment or materials needed to complete the work. Employees often use equipment provided by the employer.
Integration into the business
Employees are often integrated into the business, working as part of the organisation. Contractors generally operate their own independent business and provide services to multiple clients.
No single factor determines the outcome. Instead, the overall relationship must be considered.
Superannuation obligations for contractors
Another commonly misunderstood area relates to superannuation.
Even where a worker is genuinely engaged as a contractor, businesses may still be required to pay superannuation contributions in certain circumstances.
For example, superannuation may be payable where a contractor is paid primarily for their labour rather than for delivering a result.
Many businesses overlook this requirement, which can lead to unexpected liabilities if reviewed by the ATO.
Penalties for sham contracting
The consequences of sham contracting can be significant.
Under the Fair Work Act, penalties may apply where a business:
Misrepresents an employment relationship as contracting
Dismisses or threatens to dismiss a worker to engage them as a contractor
Knowingly makes false statements to persuade someone to become a contractor
Maximum penalties can include:
Up to $19,800 for individuals
Up to $99,000 for small businesses
Up to $495,000 for larger businesses or three times the underpayment amount in serious cases
In addition to penalties, businesses may also be required to pay back entitlements, including superannuation and leave.
Why reviewing contractor arrangements is important
With regulators increasing their focus on sham contracting, businesses that engage contractors should take the opportunity to review their arrangements.
A contractor relationship should reflect the reality of how work is performed in practice, not just what is written in a contract.
Regular reviews can help identify potential risks before they become compliance issues.
If your business engages contractors and you are unsure whether the arrangements are compliant, it may be beneficial to seek professional advice. Sunday HR provides practical support to businesses navigating contractor compliance and workforce classification.
You can learn more about the services available through our Outsourced and Fractional HR support here: How Sunday HR Helps.
How Sunday HR can help
Understanding whether a worker should be classified as an employee or a contractor can be complex.
Sunday HR supports businesses by helping review contractor arrangements and identify potential compliance risks. This may include:
Reviewing contractor agreements
Assessing working relationships against legal criteria
Identifying potential superannuation obligations
Advising on appropriate engagement structures
Taking a proactive approach can help businesses avoid regulatory issues and ensure their workforce arrangements remain compliant.
If you would like support reviewing your contractor arrangements or ensuring your business meets its workplace obligations, you can get in touch with Sunday HR here: Contact Us.
Frequently Asked Questions
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Yes. Having an ABN does not automatically mean a worker is a contractor. Regulators look at the overall working relationship to determine whether someone is operating their own business or working as an employee.
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In some circumstances, yes. If a contractor is paid primarily for their labour rather than for delivering a result, the business may still be required to make superannuation contributions.
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Penalties under the Fair Work Act can be significant, including fines of up to $495,000 for larger businesses, in addition to back payments for unpaid entitlements.
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Businesses should review the overall working relationship, not just what is written in a contract. Regulators will typically look at factors such as who controls how the work is performed, whether the worker can subcontract the work, who provides tools and equipment, and whether the worker is operating their own independent business.
If there is uncertainty, it is important to review the arrangement early. Seeking advice or conducting a contractor compliance review can help businesses ensure they are meeting their legal obligations and reduce the risk of penalties.