Regulators increase focus on sham contracting

The Australian Taxation Office and the Fair Work Ombudsman (the Regulators) have recently announced increased scrutiny of sham contracting, following intelligence showing concerning patterns in several industries including the building and construction sector.

Members should be aware of what this means and how it may affect their businesses.

What is sham contracting?

Sham contracting occurs when a business represents a worker as an independent contractor when the nature of the relationship is actually that of an employee, often to avoid paying legal entitlements like leave, superannuation, and penalty rates to the disadvantage of the employee.

Misclassification can occur intentionally or inadvertently, but it is unlawful where a business:

• misrepresents an employment relationship as an independent contracting arrangement, knowing this is not the case
• knowingly provides false or misleading information to persuade an employee to become a contractor performing the same work
• dismisses or threatens to dismiss an employee in order to re-engage them as a contractor doing substantially the same work.

Regulators emphasise that simply labelling a worker as a “contractor” does not determine the nature of the relationship. The practical reality of the arrangement will be the main consideration and not what is stated in the contract.

Potential Penalties

Under the Fair Work Act 2009 (Cth), courts can impose significant penalties for sham contracting contraventions. Maximum penalties currently include:

• $19,800 for individuals
• $99,000 for businesses with fewer than 15 employees
• For larger businesses: the greater of $495,000 or three times the underpayment amount.

Businesses that incorrectly classify workers may also face additional consequences, including:

• PAYG withholding penalties for failing to withhold tax
• liability for unpaid superannuation and the super guarantee charge (SGC)
• interest, administration fees and additional super penalties under the Superannuation Guarantee (Administration) Act 1992.

Importantly, workers who are engaged principally for their labour are entitled to super regardless of whether they are correctly classified as an independent contractor.

Increased data monitoring

Through Taxable Payments Annual Reporting (TPAR), the ATO receives information about payments made to contractors in industries such as construction, road freight, cleaning, courier, security and IT. This data is matched against:

• tax returns
• ABN records
• superannuation reporting
• Single Touch Payroll information.

For the 2024 – 2025 year alone the TPAR provided visibility of almost 185,000 businesses making payments to more than 1.4 million contractors, totalling over $507 billion. From this information the ATO identified significant non-compliance for action.

What members should consider

Given the increased focus from regulators, members should:

• Review current worker arrangements to ensure classifications are correct
• Ensure contractor agreements reflect the actual working relationship
• Seek advice from a qualified tax professional or workplace adviser if uncertain.

Taking a proactive approach can help reduce the risk of compliance issues and ensure arrangements align with legal requirements.

For questions about your workplace obligation, please contact the Workplace Relations Team:

📞 (02) 6175 5900
📧 workplace@mba.org.au