Sham contracting explained: when ‘independent’ isn’t really independent

The reality is that dealing with independent contractors is tricky, and the line between employees and contractors is often blurred.

Blogs 1 July, 2025

Sham contracting explained: when ‘independent’ isn’t really independent

Independent contractors now make up a significant portion of the Australian workforce, and the reality is that dealing with this employment type is tricky. While it offers workers greater flexibility and control over their work, the line between employee and contractor can get blurry in a hurry.

Under the Fair Work Act 2009 (Cth) (FW Act), it’s unlawful to misrepresent an employment relationship as an independent contracting arrangement – a practice known as sham contracting.

Here, we explain everything you need to know so you can spot the difference and protect your business.

So, what is sham contracting?

A sham contracting arrangement occurs when an employer deliberately disguises an employment relationship as an independent contractor agreement, depriving the worker of lawful entitlements including minimum wages, leave, superannuation, and protections under the National Employment Standards (NES).

It’s unlawful to:

misrepresent an employment relationship as an independent contracting arrangement.
dismiss (or threaten to dismiss) an employee for the purpose of re-engaging them as an independent contractor to perform the same or substantially similar work.

Employee or contractor: what are the key distinctions?

As a result of the Closing Loopholes No.2 Act 2024, a definition of employment has been introduced into the FW Act. Whether an individual is an employee or contractor is to be determined by ascertaining the real substance, practical reality and true nature of the working relationship. In making this determination, the following must be considered:

the real substance, practical reality and true nature of the working relationship; and
in considering the totality of the relationship, regard must be had not only to the terms of the contract governing the relationship, but also to other factors relating to the totality of the relationship, including but not limited to how the contract is performed in practice.

There are several factors that may be relevant in determining the difference between an employee and an independent contractor. Both employers and workers should be mindful that there is no single indicator that will determine if a worker is a contractor or an employee. Courts look at the totality of the relationship between the parties when determining the exact nature of a person’s engagement.

We detail below some common factors that may help determine whether a person is an employee or an independent contractor.

Indicator	Employee	Independent Contractor
Level of control over how work is performed	Performs work under the direction and control of their employer, on an ongoing basis.	Works with a high level of independence and flexibility over how and when work is completed.
Hours of work	Generally works standard or set hours (note: casual employee’s hours are likely to vary from week to week).	Under agreement, decides what hours to work to complete the required task.
Expectation of work	Generally, has an ongoing expectation of work (note that some employees may be engaged for a specific task or specific period).	Generally engaged for a specific task, rather than an ongoing expectation of work.
Delegation of work to another person	An employee will not be able to delegate the provision of their services to another and will have to perform the work personally.	If an individual has the ability to delegate (or sub-contract) the work to someone else, rather than perform the services personally, this is a strong indicator that the person is a contractor.
Requirement to wear a uniform	Employees are commonly required to wear uniforms branded with their employer’s name, or required to adhere to uniform/dress policies.	Generally, a contractor is not required to wear a uniform. If a worker is required to wear a uniform bearing the logo of the Practice, this can be indicative of an employment relationship.
Superannuation	Entitled to superannuation contributions paid into a nominated superannuation fund.	Generally pay their own superannuation (note that in some circumstances independent contractors may be entitled to be paid superannuation contributions for their benefit).
Refusal of work	An employee (with the exception of casual employees) is generally not able to ‘refuse’ work offered to them.	A contractor will usually have the ability to refuse work offered to them.
Tools and equipment	Tools and equipment are typically provided by the employer, or a tool allowance is provided.	Generally uses their own tools and equipment (note that alternative arrangements may be made within a contract for services).
Tax	Has income tax deducted by their employer.	Pays their own tax and GST to the Australian Taxation Office.
Method of payment	Paid regularly (for example, weekly/fortnightly/monthly).	Has obtained an ABN and submits an invoice for work completed or is paid at the end of a project or contract for service.
Leave entitlements	Entitled to receive paid leave (including annual leave, personal/carer’s leave, long service leave) or in the case of casual employees, receive a loading in lieu of leave entitlements.	Does not receive paid leave.

Although the contractual agreement between the parties is not solely determinative of the nature of the engagement (rather the nature of the totality of the relationship is what is assessed), it is important that the agreement explicitly states whether the contract is one of an employer-employee relationship or a principal-independent contractor relationship. Since employees and contractors have different rights and obligations, the question of which relationship an individual falls under has massive implications for an individual’s entitlements, including leave, minimum wages, and access to unfair dismissal claims. In addition, a business that engages in sham contracting can be fined $495,000 per contravention!

$197,000 in penalties for sham contracting

In a 2024 Federal Court decision, the Fair Work Ombudsman (FWO) secured $197,000 in penalties against Doll House Training Pty Ltd, a Sydney-based company operating in robotics and artificial intelligence for health and wellness.

Between August and October 2020, the company engaged three workers with disabilities via an employment services provider. In October 2020, it issued Independent Contractor Agreements (ICAs) to these workers to reclassify their employment, despite the agreements containing terms indicative of standard employment.

The Court’s findings

Justice Scott Goodman ruled that the ICAs were, in substance, employment contracts. He cited:

The nature of the rights and obligations in the agreements.
A significant power imbalance between the parties.
The fact that two workers felt compelled to sign the ICAs to avoid losing their jobs.

The company had also:

Failed to pay full wages on a monthly basis.
Ignored a Notice to Produce documents issued by a Fair Work Inspector.
Caused one vulnerable worker to borrow from a short-term lender due to non-payment.

Justice Goodman noted the company’s lack of cooperation and contrition, which worsened the financial penalties imposed.

Fair Work Ombudsman Anna Booth emphasised that sham contracting undermines workers’ rights, especially for vulnerable individuals. She reaffirmed the FWO’s commitment to enforcing the law, rectifying underpayments, and holding non-compliant employers accountable.

How can you minimise risk? Cover your bases with Citation HR

This case is just one example of how misclassifying and intentionally issuing independent contracting agreements to avoid paying employees what they’re entitled to under the NES can result in significant financial penalties and reputational damage. With sham contracting becoming increasingly common in Australia, it’s now more important than ever to ensure you’re correctly engaging individuals in your business.

Citation HR Software is our innovative Human Resources Information Solution (HRIS), and it’s included in every Citation HR subscription! It contains all the tools and checklists you’ll need to ensure you’re lawfully engaging independent contractors. Our checklist contains an array of documentation, including:

Robust Independent Contractor Agreements;
Confidentiality Agreements;
A suite of company policies and procedures; and
A place to upload and store the person’s insurance details, including Workers Compensation Insurance, Public Liability Insurance, and Professional Indemnity Insurance.

If any of this information has raised questions about independent contracting for your business or you’ve got another workplace matter you need assistance with, our friendly team of workplace relations experts are here to help. Contact us here.

Not a Citation HR client? Why not try out our advice? Arrange your confidential, no-strings-attached workplace compliance consultation with our team today.

About our author

Kurt Calma is a Workplace Relations Consultant at Citation HR. He regularly provides advice on workplace matters via the 24/7 HR advice line to find solutions for clients.

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