Closing Loopholes: Sham Arrangements

Closing Loopholes: Sham Arrangements


Independent contractors can be individuals, partnerships, trusts, companies, or other entities that provide services to others for a fee. Where independent contractors are individuals who carry out work for a business, there can sometimes be uncertainty about whether the contractor is, in fact, an employee of that business.

To avoid this uncertainty and future disputes when engaging a worker, it is important to:

• consider whether employment or contracting is most suitable to your business’s needs

• accurately record the agreed arrangement in a written contract

• be transparent with the worker about the nature of their engagement, and

• ensure that you and the worker perform your obligations in accordance with the contract, to avoid changing the terms of your contract by accepting a different way of performing it in practice.

What is the difference between an employee and independent contractor?

The table below includes common indicators of employment and independent contracting to help you decide which arrangement best suits your business’s needs.

Sham contracting arrangements

A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contractor arrangement. The most common reason for doing this is to avoid paying employee entitlements.

Under the sham contracting provisions of the Fair Work Act 2009 (FW Act), an employer cannot:

• misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement

• dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor or

• make a knowingly false statement to persuade or influence an employee to become an independent contractor.

The FW Act provides serious penalties for contraventions of these provisions.

The courts may impose a maximum penalty per contravention. The amounts of the penalties can be found here.

A sham contracting defence is available for employers who have incorrectly classified an employee as an independent contractor. This defence provides that an employer has not contravened the sham contracting provisions if, at the time of the representation, the employer reasonably believed the contract of employment was a contract for services. This is determined by having regard to the size of the enterprise and any other relevant matters.

Payroll tax and workers compensation

You may still be liable for payroll tax in relation to independent contractors. Payroll tax is a state-based tax. Therefore, please contact your state/territory revenue office or your accountant for further information.

Many people working as contractors are still treated as workers for the purposes of workers compensation and you may still be liable for and required to hold workers compensation insurance in relation to independent contractors. Again, each state has different legislation on who is a worker for the purposes of workers compensation. Please contact your state workers compensation body for further guidance.

Labour hire arrangements

Labour hire companies that engage contractors should ensure that the written agreement in place with the worker does not include a right to control where, when and how a worker performs their work with the host employer to ensure that the arrangement is a genuine contractor arrangement. If you need further assistance with deciding whether to engage an employee or independent contractor, please call the Advice Team on 1300 651 415 or send an email to

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