Sham contracting occurs where an employer tries to mask an employment relationship as an independent contractor arrangement in order to avoid their obligation to provide employee entitlements, such as entitlements under awards, enterprise agreements and the National Employment Standards.
It is unlawful under the Fair Work Act 2009 for an employer to:
- misrepresent to a person that they are an independent contractor when a reasonable person would know they are an employee;
- dismiss or threaten to dismiss an employee so they can then engage them as an independent contractor;
- make a knowingly false statement to an employee (or former employee), who is employed to perform particular work, so as to persuade or influence that person to become an independent contractor and still perform the same, or substantially the same, work.
Key risks of getting it wrong
Some of the risks include:
- The Fair Work Ombudsman can prosecute employers who enter into sham contracting arrangements with their workers and Civil penalties are as follows per breach of sham contracting provision:
| Per contravention * | Serious contravention * | |
|---|---|---|
| Individuals | $19,800 | $198,000 |
| Small business (fewer than 15 employees) | $99,000 | $990,000 |
| Large business (15 or more employees) | The greater of $495,000 and 3 x the amount of the underpayment | The greater of $4,950,000 and 3 x the amount of the underpayment |
*Please note that the figures were correct as of 10 May 2026, but do change from time to time and are a guide only.
- An individual can also make a claim under the general protection provisions of Fair Work Act 2009 alleging sham contracting and the same civil penalties apply.
- If sham contracting is proven then, in addition to the civil penalties, the employer would be required to back pay the individual found to be an employee all employee entitlements, including superannuation.
The Australian Taxation Office and the Fair Work Ombudsman will investigate employers that intentionally try to avoid their obligations by misclassifying employees as independent contractors.
How can we help you?
We can advise and represent you in any claim made by a contractor or the Fair Work Ombudsman alleging that you have engaged in sham contracting. Speak to one of our experienced Employment Lawyers.
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