Businesses convicted of sham contracting could face fines of up to $500,000, as the Australian Taxation Office (ATO) and Fair Work Ombudsman (FWO) ramp up their crackdown on the practice.

Sham contracting happens when an employer misrepresents to a worker that an employment relationship is an independent contracting arrangement. This might be done to avoid paying entitlements such as superannuation, leave, and workers’ compensation. 

“Some businesses seem to think they can dodge their employee obligations, like paying super and other entitlements, simply by saying their employees are independent contractors,” said ATO assistant commissioner Tony Goding. “This doesn’t pass the pub test; it’s also illegal, and we’re shining a light on those trying to hide in the shadows.”

Fair Work Ombudsman Anna Booth added that employers should be aware that FWO has investigations underway into alleged sham contracting in sectors such as building and construction and road transport.

“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,” she said.

Under the Fair Work Act, individuals and businesses with fewer than 15 employees can be fined $19,800 and $99,000, respectively, for sham contracting. For businesses with 15 or more employees, the penalty will be the greater of $495,000 or three times the underpayment amount.

In one example, the FWO secured nearly $200,000 in penalties against a Sydney health and wellness research company after it terminated or threatened to terminate the employment of three workers to re-engage them as independent contractors to perform substantially the same work.

Taskforce and tip-offs

Goding noted that the ATO is working with the FWO and other regulators as part of the Shadow Economy Taskforce to protect workers and honest businesses.

The taskforce is constantly sharing intelligence across agencies, including almost 1000 community tip-offs each week from workers, customers and competitors, who know or suspect tax evasion behaviours, including sham contracting.

In 2024–25, the ATO received more than 7000 tip-offs relating to the building and construction industry, of which around 20 per cent were allegations of sham contracting. More than 800 tip-offs came from the road freight industry over the same period, with nearly 25 per cent referring to sham contracting.

“Businesses that think they can get away with dressing employees up as contractors should know that our extensive data-matching and community tip-offs are shining a bright spotlight on their way,” Goding said.

“Workers with concerns they may be in a sham contracting arrangement are urged to contact the Fair Work Ombudsman directly to seek assistance,” he added.

• This story was originally published on Inside Small Business.