Sham contracting is often discussed as though it only occurs when a business deliberately creates an elaborate scheme to avoid paying employees properly.
The reality can be much less obvious.
A contracting arrangement can begin with legitimate commercial intentions and gradually change. A business can inherit practices that have been used for years. A worker can even request to be paid through an ABN.
None of those circumstances mean the arrangement should simply be assumed to be compliant.
For employers, the question is not whether the word contractor appears in the agreement.
The question is whether the working relationship actually supports it.
What is sham contracting?
Sham contracting can occur when a business represents an employee as an independent contractor when the business does not reasonably believe that the worker is genuinely a contractor.
The Fair Work Ombudsman also identifies prohibited conduct including knowingly making a false statement to persuade an employee to perform substantially the same work as a contractor, or dismissing or threatening to dismiss an employee in order to re-engage them as a contractor to perform the same or substantially the same work.
Sham contracting is unlawful, and enforcement attention is not theoretical. In March 2026, the Fair Work Ombudsman and Australian Taxation Office jointly announced an increased focus on sham contracting practices.
Contractor or employee?
There is no single magic factor.
For many constitutionally covered Australian businesses, the current Fair Work approach requires consideration of the real substance, practical reality and true nature of the relationship, including both the contractual terms and how the arrangement operates in practice.
Relevant factors can include:
- who controls how the work is performed
- financial risk
- who provides tools and equipment
- whether the worker can delegate or subcontract
- how working hours are determined
- whether there is an expectation of ongoing work.
No single factor necessarily determines the outcome. This is why apparently similar arrangements can produce very different conclusions.
Scenario 1: “He has an ABN, so he’s a contractor”
A growing business hires Daniel to manage projects.
Daniel is asked to obtain an ABN and submit an invoice every fortnight.
He works Monday to Friday from the company’s office, uses a company laptop, reports to the Operations Manager and is required to work standard company hours. He cannot send another person to perform the work, the engagement continues for two years, Daniel’s invoice says Consulting Services, but the label alone does not determine the relationship.
Fair Work specifically warns that a worker does not automatically become a contractor because they have an ABN or issue invoices.
The lesson: An ABN is an administrative feature, not a workforce classification test.
Businesses need to examine how the relationship actually operates.
Scenario 2: The worker asks to be a contractor
Sarah is offered a role with a company. She tells the employer, “I’d prefer to invoice through my own company.” The business agrees and Sarah then performs exactly the same duties as other employees. She works the same roster, reports to the same manager, follows the same processes and has little control over how the work is performed. The business assumes the arrangement must be safe because Sarah requested it – that is dangerous reasoning.
Parties cannot necessarily determine the legal character of a relationship simply by agreeing on a label.
The lesson: Worker preference does not replace the need to structure the engagement correctly.
Businesses should assess the actual relationship even when contracting is requested by the worker.
Scenario 3: The genuine independent consultant
A manufacturer engages an operational improvement consultant for a four-month project, and the consultant operates an established consultancy.
She:
- works with several clients
- determines how the project will be delivered
- uses her own systems and equipment
- carries professional indemnity insurance
- invoices against agreed project milestones
- can engage other suitably qualified people through her business
- carries financial responsibility for completing the agreed scope
- is engaged to produce defined deliverables.
This looks very different from simply placing an individual into an existing employee position.
The lesson: Genuine contracting is about operating an independent business, not merely being paid differently.
A carefully drafted agreement should support that commercial reality rather than attempting to manufacture it.
Scenario 4: An employee is told to become a contractor
Michael has worked as an employee for several years, his employer tells him that from next month he will need to obtain an ABN and invoice the company. His job, manager, work location, hours and responsibilities will remain unchanged and the only real difference is the payment structure.
This should immediately raise concern.
The Fair Work Act specifically addresses conduct involving employees being moved into contractor arrangements to perform the same or substantially the same work.
The lesson: Changing the payment mechanism does not necessarily change the underlying relationship.
Businesses considering restructuring existing employee arrangements should obtain appropriate advice before making changes.
Scenario 5: The contractor who slowly became part of the business
This scenario is particularly common.
A business initially engages Alex as an independent specialist for a six-month project.
At the beginning:
- Alex determines his own work schedule
- services several clients
- delivers specific project outcomes
- largely controls how the work is performed.
The project is successful, six months becomes twelve, then eighteen. Over time Alex stops working with other clients. He is given an internal position title, begins managing company employees, attends mandatory staff meetings, works fixed company hours and requires approval for leave.
Nobody updates the agreement because Alex is still issuing invoices. The original arrangement may have been genuinely commercial, but the relationship has evolved.
Under the whole-of-relationship approach applicable to many businesses, how a contract is performed in practice matters. Fair Work specifically advises businesses to reconsider existing arrangements where the practical relationship has changed.
The lesson: Contractor classification should not be a set-and-forget decision.
Long-running engagements should be periodically reviewed.
Scenario 6: High day rate means contractor
A highly specialised professional earns $1,500 per day. Management assumes there cannot be a classification issue because the contractor earns substantially more than an equivalent employee. Remuneration level alone does not determine whether someone is an employee or contractor.
From 1 July 2026 the contractor high-income threshold is $190,100, and certain eligible workers above the threshold can elect to opt out of the whole-of-relationship test so that the start-of-relationship test applies instead. But that is a specific statutory mechanism requiring the relevant requirements to be satisfied; high earnings themselves do not simply convert a worker into an independent contractor.
The lesson: A premium rate is not a substitute for a properly structured engagement.
Warning signs worth reviewing
No individual factor automatically means an arrangement is incorrect. However, businesses should consider reviewing contractor arrangements where several of the following are present:
- the person works exclusively for one organisation
- the engagement has continued indefinitely
- hours are dictated by the business
- the individual works in the same way as employees
- the worker cannot delegate or subcontract
- the worker carries minimal commercial risk
- all equipment is supplied by the business
- the person is managed through the normal employee reporting structure
- leave or absences require company approval
- the person has been given an internal employee-style title
- the arrangement has materially changed since the contract was signed.
The more the practical relationship changes, the more important it becomes to revisit the original classification.
Good contracting starts before the person begins
Businesses can reduce uncertainty by defining the engagement properly at the beginning. Before engaging a contractor, establish:
What is being purchased? Is it labour capacity, specialist services or a defined outcome?
Who will control delivery? Will the person independently determine how the services are performed?
What commercial risk does the contractor carry? Is the contractor genuinely operating a business?
Can the work be delegated? Is the business purchasing the personal labour of one individual or services from an enterprise?
How will the arrangement work day to day? Does operational reality support what the contract says?
And once the engagement begins, review it if circumstances materially change.
Structure the engagement, don’t just label it
Contractors play an important role in Australia’s workforce.
They provide businesses with specialist expertise, flexibility and access to capability that may not be required permanently.
The issue is not contracting itself.
The issue is using a contractor structure where the practical relationship does not support one.
Good workforce governance starts by identifying what the business actually needs and selecting an engagement model that fits that requirement from the outset.
Know before you engage
APSG works with organisations across permanent recruitment, labour hire and contracting to build workforce models suited to the requirement rather than forcing every engagement into the same structure.
Before your next contingent worker starts, make sure the engagement model matches the work. Contact APSG to discuss your workforce requirements.
This article provides general information only and does not constitute legal, taxation or financial advice. Worker classification can be complex and businesses should obtain appropriate professional advice regarding individual engagements.
