Skip to content

What A Sham! The Increased Sham Contracting Epidemic

What A Sham! The Increased Sham Contracting Epidemic


  • Sham contracting is where businesses knowingly, or recklessly, hire a worker as an independent contractor when they are instead (and in fact) an employee of the business.
  • Sham contractors, or businesses who engage workers as an independent contractor when they are actually an employee, attempt to undercut competitors by illegally lowering the tax and super obligations and denying workers of their rightful employee entitlements.
  • Penalties for sham contracting include a maximum of $13,320 for individuals or $66,600 for companies, for each infringement, in addition to further superannuation payments over and above the minimum superannuation charge.

As the range of businesses in the commercial sector grows, so too can the confusion around the relationship between an individual and an employer.

So, what is the difference between the two? An employee is someone who works for an employer in a commercial enterprise, whereas a contractor is an individual, or business, which carries out specific functions for another company for a specified amount of time. Other differences which can separate the two forms of employment include wages (contractors do not have a minimum wage), superannuation ( employees are entitled to this from their employers, and contractors are not), and tax (as employees have PAYG tax deducted from their pay, whereas contractors are required to make payment of their own PAYG).

Sham Contracting

Sham contracting occurs where an employer knowingly, or recklessly, tells a worker that they are an independent contractor when they are actually an employee of the business.

Sham contracting is an illegal practice. Therefore, employers must ensure that they do not:

  • Tell an employee that they are an independent contractor when they are not.
  • Make false statements to employees to make them become independent contractors.
  • Dismiss an employee if they do not become an independent contractor.
  • Dismiss an employee and instead hire them as an independent contractor to complete the same work.

Penalties and Charges

Sham contracting carries a maximum penalty of $13,320 for individuals and $66,600 for corporations for each infringement. However, businesses are also risking the following penalties and charges:

  • PAYG withholding penalty.
  • Super guarantee charge including any shortfall amounts, interest charges and administration fees.
  • An additional super guarantee charge of up to 200%.

The Tests of an Employee vs Contractor

There are various tests of whether an individual is an employee or a contractor. Put simply, an employee is an individual that works as a part of your business and is in your business. A contractor on the other hand is an individual running their own business.

We have summarised the main indicators of employee vs contractor below:

Employees Independent Contractors
Employees cannot usually pay someone else for doing the job assigned to them. Often, contractors can subcontract or delegate, paying someone else to do their job.
Employees are paid for their time worked (most common), a price per item or activity, or by way of commission. Contractors are paid for a result achieved based on the quote provided. Usually, costs are calculated at an hourly rate or price per item.
Employers usually supply their employees with appropriate and relevant equipment or tools such as computers or trade tools. On some occasions, employers will also reimburse employees for tools purchased. Contractors supply all or most of their own equipment or tools required to do the work. An allowance or reimbursement is not given to the contractor.
Employers have the right to control the work that is done by their employees and can direct how the worker does their work. A contractor can have freedom in the way in which the work is done for the business that has engaged them. This is subject to any terms in an agreement.
Businesses are usually liable for any costs for defective work performed by an employee. As a contractor, you take commercial risks and can be held legally liable for any costs associated with rectifying any defective works.

Employees Rights and Entitlements

If you believe that you may be an employee in a sham contracting arrangement, speak to the business to see if the issue can be rectified internally. If this does not provide you with a satisfactory result, seek legal advice.

If you are deemed to be an employee, the following rights and entitlements apply (and you are missing out on, in a sham contract arrangement):

  • Minimum wage
  • Penalty rates
  • Leave
  • Superannuation
  • Specified guidelines relating to hours of work, breaks and rosters
  • Protections at work
  • Entitlements regarding uniforms, vehicle, and travel

Next Steps

If you believe a workplace is involved in sham contracting, and you do not wish to obtain personalised legal advice, you can provide the ATO with a tip through the tip-off form on their website, or you can phone 1800 060 062.

If you do wish to obtain legal advice (whether as an employee who thinks they may have been illegally coaxed into a sham contract or as an employer who is concerned they may be sham contracting their workers), please contact our employment law team to discuss your matter further. Our employment law team can assist both the employee and employer by entering into negotiations to transition to an employee/employer relationship, negotiate the terms of an employment contract, or further, prepare the necessary court documents to commence a claim for unpaid entitlements and wages.

For further information please don’t hesitate to contact:
1300 268 887

Contact Coutts today.

This blog is merely general and non-specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever to this blog, including all or any reliance on this blog or use or application of this blog by you.

Contact Us