What is Sham Contracting

Sham contracting is when an employer tries to disguise an employment relationship as an independent contracting arrangement. This is usually to avoid paying legal minimum rates of pay, tax, and entitlements, such as annual leave and sick leave. Arrangements such as these are not genuine and may be regarded as sham contracting.

Employers should be careful to avoid sham contracting. Just because a worker has an ABN or invoices for payment doesn’t automatically mean they are an independent contractor. Calling someone an independent contractor or getting them to sign a contract saying they’re an independent contractor doesn’t automatically make them one either.

Sham contracting arrangements are unlawful under the Fair Work Act 2009 (FW Act).

Employers should be warned – currently the courts are cracking down on sham arrangements and employers will be penalised if they contravene the legislation. It doesn’t really matter what name you give the relationship with your workers, or what type of contract you have; the courts will look at how that relationship works in practice, and impose heavy fines if you short-change your workers.  

To avoid corporate and/or personal liability, company directors and other senior managerial staff must ensure that they act within the scope of the law in their employment arrangements and that they are properly advised about any contracts in question.

Employers can avoid a contravention of the sham contracting provisions if they can show that they did not know that it was a contract of employment, rather than a contract for services and must also demonstrate that the intention was not reckless.