On 13 March 2026, the Fair Work Ombudsman (“FWO”) and Australian Tax Office (“ATO”) published a joint media release regarding their shared focus on stamping out sham contracting.
What is sham contracting?
Sham contracting relates to a situation where an individual, who is for all intents and purposes an employee, is instead deliberately engaged as an independent contractor. Oftentimes, the purpose of such an arrangement is to avoid liabilities such as leave, superannuation and award entitlements.
At law, it does not matter if the contract between the parties labels an individual as a contractor, or states that the relationship is that of principal and contractor. Section 15AA of the Fair Work Act 2009 (Cth) (“Act”) confirms that “the real substance, practical reality and true nature of the relationship” between the parties is determinative when assessing whether an employment relationship arises. This requires an analysis of:
(a) the totality of the relationship between the parties; and
(b) not only the terms of the contract governing the relationship, but also to other factors including how the contract is performed in practice.
Increased enforcement and targeted industries
The regulators’ joint media release highlighted a range of initiatives to detect and investigate sham contracting practices.
Specifically, the ATO-led Shadow Economy Taskforce (“SET”) received more than 7,000 tip-offs in the 2024-25 financial year regarding alleged tax evasion behaviours in the building and construction industry, with 20% relating to suspected sham contracting. A further 800 tip-offs were received in connection with the road freight industry, with 25% of those reports referring to sham contracting.
The FWO is one of 11 government agencies involved in the SET and has various compliance and enforcement powers to act on suspected sham contracting.
Taxable payments annual reporting data is also being utilised to identify contractors who work almost exclusively for one business – a factor which commonly suggests that a working relationship is more likely to be that of employment.
Anna Booth, the Fair Work Ombudsman, stated:
We won’t hesitate to take enforcement action where we find unlawful activity in any sector.
We are pleased to be joining forces with the ATO to shine a spotlight on this unlawful practice that leaves workers worse off and can land employers in court, exposed to significant penalties.
Penalties and recent court action
As to what those penalties could be, the current maximum penalties for a contravention are:
$495,000 (or 3 x the underpayment amount) for businesses with 15 or more employees;
$99,000 for businesses with less than 15 employees; and
$19,800 for individuals involved in a breach.
In July 2024, the Federal Court found Sydney-based health and wellness research company, Doll House Training Pty Ltd (“Doll House”), to have breached sham contracting laws and ordered it to pay $197,000 in penalties. The FWO took action against Doll House upon learning that the company had originally engaged a number of workers as employees, but later terminated or threatened to terminate their employment in order to re-engage them as independent contractors – when in reality they continued to be employees at law.
What should employers do now?
In light of the FWO and ATO’s media release, employers should carefully review their contracts and seek advice if there is any doubt as to the proper legal characterisation of a working arrangement.
While engaging an individual as an independent contractor may initially present as a more cost-effective option, the prospect of regulator scrutiny and significant financial penalties is not worth the risk.
Please contact Cassie Burfoot, Director, Emily Gray, Senior Associate, or Jemma Andretzke, Lawyer if you have any questions about your organisation’s workforce arrangements.
