Sham contracting (sham contracting arrangement)

Last updated September 2026

Sham contracting is when an employer  labels a worker as an independent contractor when they are, in reality, an employee. This practice is unlawful under the Fair Work Act 2009.  

A genuine independent contractor arrangement is different, where a worker operates their own business and works on their own account, with greater control over how, when and where the work is performed. 

What it means in practice

Sometimes an employer will ask a worker to set up an ABN and sign a contract as an independent contractor, even though the position is really a job. This can be an attempt to avoid paying employee entitlements such as minimum wages, leave, superannuation and other workplace protections. 

But having an ABN does not mean you are necessarily an independent contractor. You can have an ABN and still be an employee. What matters is the reality of the working relationship and the legal rights and obligations of the parties, not what the arrangement is called. 

Why sham contracting is unlawful 

The Fair Work Act prohibits employers from engaging in sham contracting. Specifically, an employer must not: 

• misrepresent an employment relationship as an independent contractor arrangement 

• dismiss (or threaten to dismiss) an employee to re-engage them as an independent contractor 

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

 Since 27 February 2024, it has become harder for employers to rely on a defence to a sham contracting claim. An employer must now show that they reasonably believed the worker was an independent contractor at the time the representation was made. 

Employee or contractor: the reality test 

When determining if a worker is an employee or an independent contractor, for Fair Work Act purposes, the law looks at the real substance, practical reality, and true nature of the relationship, not just the terms of a contract. Key factors (there is no exhaustive list) may include: 

• Who controls how you work and when? 

• Who carries the financial risk? 

• Can you send someone else to do the work? 

• Do you run your own business, market your services, and invoice clients? 

• Do you set your own hours or are they set by the business? 

• Do you use your own tools and equipment? 

Note: Be aware that the Fair Work Act test does not necessarily apply to the meaning of “employee” under other laws (for example taxation, superannuation or workers’ compensation laws can apply different tests) 

Penalties and what you can get back 

Civil penalties apply for each breach of sham contracting provisions. A worker who has been misclassified can recover unpaid entitlements such as annual leave, sick leave, superannuation, and the correct rate of pay, including any penalty rates or allowances.  

What to do if you think you are in a sham arrangement 

• Keep detailed records of your hours worked and how your work is directed by the employer 
• Talk to your union for advice and support. Your union can assess whether you have been misclassified and help you recover what you are owed. 

Go deeper

• Modern Awards
• Enterprise Agreements
• The National Employment Standards
• Casual workers
• Fair Work Ombudsman