Anja Pich is a commercial lawyer and the Managing Lawyer at Lawpath. She practises across all areas of commercial law and advises businesses of every size, from first-time founders to established companies, on their legal, regulatory and commercial needs.
Sham contracting is when a business tells you that you’re an independent contractor, but the way you actually work makes you an employee. It’s illegal under the Fair Work Act, and the word “contractor” on your agreement doesn’t change the answer.
Most people only start asking this question when something goes wrong. The work dries up overnight, a leave request gets laughed off, or your accountant asks why nobody pays your super. Sound familiar? Spotting a sham contract early is far easier than unpicking one later.
- The label on your contract doesn’t decide your status. Since 26 August 2024, the Fair Work Act looks at the real substance and practical reality of the whole working relationship.
- Sham contracting covers more than a mislabelled contract. Sacking an employee to rehire them as a contractor, or lying to push them into contracting, is also banned.
- Penalties rose on 1 July 2026. For breaches from that date, the maximum is $21,840 per breach for an individual and $546,000 for a business with 15 or more employees.
- Misclassified workers can claim years of back pay. Award wages, leave, super and other entitlements can be recovered for up to six years.
- Reporting it is free. The Fair Work Ombudsman takes complaints online or on 13 13 94, and the ATO chases unpaid super separately.
What is sham contracting under Australian law?
Sham contracting covers more than a contract with the wrong heading. Sections 357 to 359 of the Fair Work Act 2009 (Cth) ban three separate things:
- Misrepresentation: telling a worker their job is a contract for services when the business doesn’t reasonably believe that’s true.
- Dismissing to re-engage: sacking, or threatening to sack, an employee so they come back as a contractor doing the same or mostly the same work.
- Misleading statements: knowingly saying something false to talk an employee into becoming a contractor for the same work.
You’ll also hear it called a sham agreement or a sham contract. Whatever the name, the legal question stays the same. Are you running your own business, or working in someone else’s?
One change in 2024 raised the bar for businesses. To defend a misrepresentation claim, a business now has to prove it reasonably believed you were a contractor. Before that, it was enough to show it hadn’t been reckless. “We never really thought about it” is a much weaker excuse than it used to be.
How do you know if you’re an employee or a contractor?
Courts and the Fair Work Ombudsman look at the whole relationship, from the contract terms to how the work happens week to week. No single factor settles it. Here are the signals that come up most when deciding the difference between a contractor and an employee.
| Factor | Points to employee | Points to contractor |
|---|---|---|
| Control | The business tells you how, when and where to work | You decide how the job gets done and agree on outcomes |
| Hours | Set rosters or standard business hours | You choose your hours to hit a deadline |
| Saying no | You can’t turn down shifts without consequences | You can decline work and nothing happens |
| Delegation | You must do the work yourself | You can send a qualified substitute or subcontract |
| Tools | The business supplies equipment, vehicle or software | You buy and maintain your own |
| Financial risk | Paid by the hour no matter what | You quote, wear the cost of fixing mistakes and can make a profit or loss |
| Integration | Company email, uniform, staff meetings, listed on the team page | You trade under your own business name |
| Other clients | You work for one business only | You market yourself and work for several clients |
The 2024 change many guides still miss
In 2022, two High Court decisions (Personnel Contracting and Jamsek) said the written contract was the main thing to look at. Plenty of articles still describe the test that way.
That stopped being true on 26 August 2024. A new section 15AA of the Fair Work Act tells decision-makers to look at the real substance, practical reality and true nature of the relationship. A good contract still counts. It just can’t override what actually happens day to day. Our guide to the Closing Loopholes employment changes covers the full reform package.
There’s one exception. If you earn more than the contractor high income threshold ($190,100 from 1 July 2026), you can give the business a written opt-out notice. The older, contract-focused test then applies instead. Get advice before you sign one, because it can lock you out of employee protections.
What are the warning signs of sham contracting?
In practice, sham contracting rarely announces itself. It hides in small details that add up. Watch for these:
- You were told to get an ABN to start, even though you’ll do the same work as the employees beside you.
- The contract says five days a week during business hours, or you’re rostered on fixed shifts.
- You need permission to take time off, and you sit through performance reviews.
- You can’t send anyone else to do the work, even someone just as qualified.
- You use the business’s tools, vehicle, uniform, email address or logins.
- Your hourly rate sits close to the award wage for the same job, with nothing built in for super, leave or insurance.
- The contract makes you repay the business if anyone ever decides you’re an employee.
- You were an employee last month and now you’re a “contractor” doing exactly the same job.
One or two of these won’t make your contract a sham. Five or six pointing the same way is a strong signal to get advice.
Sham contracting examples: three scenarios
These are illustrations built from patterns our lawyers see, not real client matters.
The café worker with an ABN
A café owner hires a barista and asks for an ABN and weekly invoices. The barista works rostered shifts, wears the café’s apron, uses the café’s coffee machine and gets pulled up for running late. Nothing here looks like a business. It’s a job with an invoice attached, and it’s textbook sham contracting.
The developer embedded in the team
A software company engages a developer on their own ABN. The developer has a company email address, joins daily stand-ups, uses a company laptop and works only for this client for two years. The contract talks about deliverables. Day to day, though, the developer is managed exactly like staff.
Under the whole-of-relationship test, this one leans towards employment. The risk grows every month the arrangement rolls on, which is why it’s worth knowing how long a contractor can work for the same company before alarm bells should ring.
The contractor who became an employee
A worker spends three years as a contractor, then signs an employment agreement for much the same role. When they resign, a question pops up. Do those first three years count towards long service leave?
If the contractor period was really employment, they probably do. That’s the sort of bill nobody budgets for, and it lands at the worst possible moment.
What are you owed if your contract is a sham?
If you’re found to be an employee, you’re entitled to everything an employee in your role would have received from day one. That includes:
- the minimum award or enterprise agreement pay rate, plus penalty rates, overtime and allowances
- paid annual leave and personal/carer’s leave
- superannuation guarantee contributions at 12% of ordinary time earnings
- notice of termination and, where it applies, redundancy pay
- unfair dismissal protection
- workers compensation cover under your state scheme
Underpayment claims under the Fair Work Act reach back up to six years. For anyone who’s been “contracting” a while, the numbers stack up fast.
Super is a separate question
Here’s the trade-off most people miss. A genuine contractor can still be owed super if the contract is wholly or principally for their labour. “Am I a contractor?” and “Am I owed super?” are two different questions with two different tests.
Our lawyers regularly see businesses and contractors assume that answering one answers the other. It doesn’t. You can be a perfectly legitimate contractor who’s still missing super contributions.
What are the penalties for sham contracting?
Courts can order penalties for each breach. Those penalties can hit the business and the individuals involved in it, such as directors and managers. The maximum depends on the penalty unit in force when the breach happened, and the Commonwealth penalty unit rose to $364 on 1 July 2026.
| Who | Breach before 1 July 2026 | Breach on or after 1 July 2026 |
|---|---|---|
| Individual | $19,800 | $21,840 |
| Business with fewer than 15 employees | $99,000 | $109,200 |
| Business with 15 or more employees | $495,000 | $546,000 |
Those figures are per contravention. Engage ten workers the same way and you’re looking at ten breaches, before anyone adds back pay, super, interest and the ATO’s own penalties.
Regulators are paying closer attention too. In March 2026, the Fair Work Ombudsman and the ATO announced a joint focus on sham contracting. The ATO received more than 7,000 tip-offs about building and construction in the 2024/25 year, and around one in five alleged sham contracting. In road freight, nearly a quarter of more than 800 tip-offs did the same.
How to avoid sham contracting as an independent contractor
You can’t negotiate your way into employee rights while keeping a contractor label. Status comes from how the relationship works, not what you agree to call it. So the goal is simple: make sure the reality matches the paperwork.
1. Test the job before you sign
Ask direct questions. Can I set my own hours? Can I send a substitute? Can I take on other clients? Who supplies the equipment?
If every answer comes back “no”, you’re being offered a job. Ask for an employment contract instead.
2. Read the contract for employment language
Look for fixed hours, five-day weeks, leave approval, performance management and daily timesheets. Those clauses describe employment. A real contractor agreement talks about scope, deliverables, milestones and invoices.
Treat any clause that makes you indemnify the business if you’re later found to be an employee as a red flag. Nobody can contract out of the Fair Work Act, so our lawyers expect a court to strike that clause out. Its real job is to scare you off asking questions.
3. Price like a business
A genuine contractor’s rate covers tax, super, insurance, equipment, admin and the weeks you can’t bill. If your rate barely clears the award wage, you’re absorbing an employer’s costs without an employee’s protections. Brush up on your tax obligations as a contractor before you quote.
4. Keep records from day one
Save rosters, emails giving you directions, messages about time off, your invoices and anything showing you can’t refuse work. Future you will be grateful. If a dispute ever starts, this evidence does the heavy lifting.
5. Know your unfair contract terms right
Since August 2024, contractors earning under the contractor high income threshold can ask the Fair Work Commission to vary or set aside unfair terms in their services contract. It’s one of the least-known parts of the 2024 reforms. Know it exists before you need it.
6. Get a second set of eyes
A short review by one of our employment lawyers before you sign costs far less than a back-pay fight after you leave. Bring the contract and a plain description of how the work will actually run. The second part matters more.
How to report sham contracting
Think you’re in a sham contracting arrangement? You don’t need it all worked out before you ask for help. Here’s the path most people follow.
- Gather your evidence: the contract, invoices, rosters, emails and anything showing who controls how and when you work.
- Raise it in writing with the business if you feel safe doing so. Some arrangements get fixed right here.
- Contact the Fair Work Ombudsman. You can get help with sham contracting online or call 13 13 94 between 8am and 5:30pm, Monday to Friday. The FWO can investigate and take enforcement action, but it can’t formally rule on whether you’re an employee.
- Report unpaid super to the ATO, which can pursue the business for the super guarantee charge.
- Get legal advice if you want to recover back pay, challenge a dismissal or negotiate a settlement. Some claims move fast: unfair dismissal applications are due within 21 days.
Asking about your entitlements is a workplace right. The Fair Work Act’s general protections make it unlawful for a business to punish you for making a complaint or inquiry about them.
Engaging contractors? What businesses get wrong
If you’re on the other side of the table, the same rules apply in reverse. A handful of habits cause most of the trouble:
- Trusting the contract. A tidy agreement won’t help if your managers roster, supervise and discipline the contractor like staff.
- Running contractors and casuals side by side in the same role. If two people do identical work under different labels, one label is wrong.
- Assuming a company structure fixes it. Engaging someone through their Pty Ltd lowers the risk but doesn’t remove it if they still work like an employee.
- Never reviewing the arrangement. A six-week project still running two years later deserves a fresh look.
- Forgetting payday super. Since 1 July 2026, employers must pay super at the same time as wages, so misclassification now builds super exposure every pay cycle.
Where your contractor trades through their own company, use a Contractor Agreement (Company) so the terms reflect a genuine business-to-business deal, including IP, confidentiality and insurance.
What we see in Lawpath consultations
Sham contracting comes up in Lawpath consultations across very different industries, from NDIS providers and cleaning businesses to software firms and creative agencies. A few patterns keep repeating.
The label is the most common wrong assumption. Business owners bring us agreements that say “independent contractor” on every page, then describe a worker on full-time hours, working only for them, under daily direction. The paperwork and the reality point in opposite directions. Reality wins, and we’ve seen disputes like this end in a negotiated payout to the worker.
Consultants get caught too. Independent consultants show us statements of work that require them on site at set times, lock them in personally with no right to substitute, and let the client walk away on short notice while they can’t. Our lawyers push for milestone-based scopes, hours treated as estimates only, a substitution right and mutual termination notice.
Mixed workforces create quiet risk. In care and cleaning especially, we see contractors and casual employees doing the same shifts, sometimes with contractors attending the same training as staff. That overlap undermines the contractor label for everyone involved.
History comes back to bite. When a long-term contractor converts to employment, the earlier years don’t disappear. We’ve advised on cases where the real question was whether years of “contracting” counted towards long service leave on resignation.
One question cuts through more than any other. Can the worker say no to a job without any consequence? If the honest answer is no, that’s a strong sign of employment, whatever the contract says.
Sham contracting FAQs
Is sham contracting illegal in Australia?
Yes. Sections 357 to 359 of the Fair Work Act prohibit it. For breaches from 1 July 2026, courts can impose penalties of up to $546,000 per breach on larger businesses and $21,840 on individuals involved, plus orders to back-pay entitlements.
Does having an ABN make me a contractor?
No. An ABN is a tax registration, not proof of your work status. Being told to get an ABN before you can start a job is one of the most common signs of sham contracting.
Can I be a contractor if I only work for one business?
Yes. Having one client doesn’t automatically make you an employee. It becomes a problem when it combines with set hours, no right to delegate, the business’s equipment and hourly pay with no commercial risk.
How do I report sham contracting?
Contact the Fair Work Ombudsman online or on 13 13 94, and report unpaid super to the ATO. Gather your contract, invoices, rosters and emails first. A lawyer can help if you want to recover back pay or negotiate.
Can my employer make me become a contractor?
No. Dismissing or threatening to dismiss you so you come back as a contractor for the same work is unlawful. So is knowingly making false statements to persuade you to switch.
Is a sham agreement the same as a sham contract?
Yes, in practice. Both describe an arrangement labelled as independent contracting when the worker is, in substance, an employee. The legal test is identical whichever term you use.
How far back can I claim unpaid entitlements?
Up to six years for underpayment claims under the Fair Work Act. Other claims run on much tighter clocks. An unfair dismissal application, for example, must be lodged within 21 days of the dismissal.
Do contractors get super?
Sometimes. If your contract is wholly or principally for your labour, the business has to pay super even when you’re a genuine contractor. That test is separate from the Fair Work test for employee status.
What changed for contractors in 2024?
From 26 August 2024, employee status turns on the real substance and practical reality of the whole relationship, not just the written contract. Contractors earning under the high income threshold also gained the right to challenge unfair contract terms.
Sort your contractor paperwork today
Feeling unsure about your own arrangement is completely normal. Most workers and business owners only learn these rules when something feels off, and you’ve already done the hard part by checking. The fix is rarely dramatic. It starts with paperwork that matches how you actually work.
Start your Contractor Agreement (Individual) today and set up your next engagement properly from day one.
