This is a joint media release from the Australian Taxation Office (ATO) and the Fair Work Ombudsman (FWO).
The Australian Taxation Office (ATO) and Fair Work Ombudsman (FWO) are ramping up their focus on sham contracting, with community insights and intelligence revealing concerning patterns of behaviour across several industries.
Sham contracting happens when an employer misrepresents to a worker that an employment relationship is an independent contracting arrangement when the employer doesn't reasonably believe this. This might be done in an attempt to avoid paying entitlements such as super, leave and workers' compensation. This practice undermines or ignores workers' rights and disadvantages honest businesses. Those who engage in sham contracting can face court-ordered penalties.
ATO Assistant Commissioner Tony Goding said data continues to uncover behaviour in industries including building and construction, and road freight, that doesn't contractually add up.
'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. 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', Mr Goding said.
'If you're treating workers like employees but calling them contractors, it may be illegal. That arrangement may not work out the way you might expect once the ATO and FWO have had a look.'
Fair Work Ombudsman Anna Booth said employers should be aware that FWO has investigations on foot into alleged sham contracting in sectors such as building and construction, and road transport.
'We won't hesitate to take enforcement action where we find unlawful activity in any sector,' Ms Booth said.
'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.'
Ms Booth took the opportunity to remind employers that it's unlawful to mislabel a worker as a contractor when the business doesn't reasonably believe this.
'Employers also must not knowingly say something false or misleading to convince an employee to become a contractor to do the same work, or dismiss an employee to engage them as a contractor to do the same work,' Ms Booth said.
Penalties
Under the Fair Work Act, courts can impose penalties against businesses or individuals for sham contracting. The maximum penalties for each contravention are:
- $19,800 for individuals
- $99,000 for businesses with fewer than 15 employees
- for businesses with 15 or more employees, 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 three workers' employment in order to re-engage them as independent contractors to perform substantially the same work.
Apart from the penalties imposed by the Fair Work Act, businesses who incorrectly treat an employee as an independent contractor risk other penalties and charges, including:
- PAYG withholding penalty for failing to deduct tax from worker payments and send it to the ATO
- super guarantee charge (SGC), which is more than the super that would have been paid if the worker was classified correctly. SGC consists of:
- super guarantee shortfall amount
- nominal interest
- an administration fee
- additional super guarantee penalties including the Part 7 penalty amount of up to 200% of the SGC under the Superannuation Guarantee (Administration) Act 1992.
Workers who are engaged principally for their labour are entitled to super regardless of whether they are correctly classified as an independent contractor.
Taxable payments annual reporting
Taxable payments annual reporting (TPAR) provides the ATO with visibility of payments made to contractors each year. Data from businesses in road freight, construction, cleaning, courier, security, IT and other industries is matched with tax returns, ABN records, super reporting and Single Touch Payroll to identify sham contracting warning signs, including:
- contractors who work almost exclusively for one business
- individuals operating with an ABN but failing to declare their income or lodge their tax returns.
In 2024-25 through TPAR, the ATO had visibility of almost 185,000 businesses making payments to more than 1.4 million contractors, totalling over $507 billion.
In the road freight industry, many businesses are failing to comply with TPAR obligations. The ATO has seen a spike in non-compliance of contractor payment reporting in this industry over the last few years.
'The level of visibility we have of payments made to contractors in these industries makes it much harder for those trying to avoid their obligations,' Mr Goding said.
Shadow Economy Taskforce and tip-offs
Mr Goding noted, 'we're working with the FWO and other regulators as part of the Shadow Economy Taskforce to ensure workers and honest businesses aren't being taken for a ride'.
'The ATO-led Shadow Economy Taskforce is constantly sharing intelligence across our agencies, including almost 1,000 community tip-offs we receive every week from people who know or strongly suspect tax evasion behaviours including sham contracting. Tip-offs come in from workers, customers and competitors.'
In 2024-25, the ATO received more than 7,000 tip-offs relating to the building and construction industry, with around 20% including allegations of sham contracting.
'People are tipping us off about employers requiring staff to be contractors as well as making incorrect payments or not reporting payments to contractors,' Mr Goding said.
The ATO also received over 800 tip-offs regarding the road freight industry in 2024-25, with nearly 25% 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 their way.
'For workers who are treated as contractors even though they're really employees, you're the one who's really missing out - on super, overtime, public holiday penalties, allowances, leave entitlements and basic workplace protections you should rightfully have,' Mr 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,' Ms Booth said.
The ATO encourages businesses to review their arrangements and use our online resources or talk to their registered tax professional to work out if their worker is an employee or independent contractor.
Regulators encourage workers who believe they have been misclassified to contact FWO on 13 13 94, make a tip-off to the ATO or seek legal advice.
Notes to journalists
- Sham contracting is primarily an issue of compliance with workplace relations laws. Key drivers of these arrangements are tax, wage and condition avoidance, particularly for employers to avoid PAYG withholding, super guarantee payments, and award and agreement-based penalties and allowances.
- Visit the FWO website for more information on sham contracting including an example case study.
- Visit the ATO website for more information on employees incorrectly treated as independent contractors.
- A high-resolution headshot of Fair Work Ombudsman Anna Booth is available from the Fair Work Ombudsman Newsroom.
- A high-resolution headshot of ATO Assistant Commissioner Tony Goding is available for download from our media centre.
- ATO stock footage and images are available for use in news bulletins from our media centre.
