Sham contracting is an illegal practice where an employer misrepresents an employment relationship as an independent contracting arrangement to avoid paying employee entitlements. This is done to deny workers their legal rights to minimum wages, superannuation, and leave.
This guide provides a practical checklist to help you immediately identify if you are in a sham contract and outlines the critical steps you can take to protect yourself or your business.
How Do I Know If I’m in a Sham Contract?
The key difference between an employee and a contractor lies in who controls the work and bears the financial risk. If your employer controls your hours, provides all the tools, and takes all the risk, you are likely an employee, even if your contract says otherwise.
The Sham Contract Checklist
Use this self-assessment tool to determine your true working arrangement:
| Assessment Factor | More like an Employee if… | More like a Contractor if… |
| Control over Work | The business dictates your hours and how the work is done | You have high autonomy to decide when and how you work |
| Tools & Equipment | The business provides the necessary tools and equipment | You provide your own significant tools and equipment |
| Financial Risk | You bear no financial risk; the business covers all losses | You are responsible for quoting, invoicing, and covering defects |
| Ability to Delegate | You must perform the work personally | You can subcontract or delegate the work to someone else |
| Exclusivity | You work exclusively or primarily for one business | You are free to work for multiple clients simultaneously |
| Payment Method | You are paid a regular wage or salary | You are paid per project or on completion of a task |
| Leave & Benefits | You are entitled to paid leave (annual, sick) | You receive no paid leave or superannuation |
Quick Assessment: Go through the checklist above. If your situation matches 4 or more factors in the “Employee” column despite being called a contractor, you are at high risk of being in a sham contract.
Common Mistakes to Avoid
Mistake #1: Believing an ABN (Australian Business Number) is enough to make you a contractor. It’s not. The working relationship is what matters.
Mistake #2: Thinking a signed contract stating you are a “contractor” is legally binding. The courts will look past the document to the reality of the situation.
Self-Check Method: Ask yourself: “Am I running my own business, or am I simply working in someone else’s business?” If it’s the latter, you are likely an employee.
What Are the Penalties for Sham Contracting?
Sham contracting exposes businesses to significant financial penalties and legal action from the Fair Work Ombudsman. For the worker, it results in the loss of crucial entitlements like superannuation, paid leave, and protection from unfair dismissal.
Who Faces What Consequences?
| Who is Penalised? | Potential Consequences |
| The Employer | • Fines of up to $16,500 per contravention for individuals
• Fines of up to $82,500 for companies • Ordered to back-pay all unpaid employee entitlements (super, leave, etc.) |
| The Worker | • Loss of thousands in unpaid superannuation
• No access to paid sick or annual leave • No protection from being fired unfairly |
The risks fall almost entirely on the employer. Intentionally misclassifying an employee is a serious breach of the Fair Work Act with severe financial consequences.
Suspect a Sham Contract? Your 3-Step Action Plan
If you suspect you are in a sham contract, the first step is to gather your records. The next is to seek advice, and the final step is to report the arrangement if necessary.
| Action | Best For… | Key Consideration |
| 1. Gather Evidence | Everyone. This is the essential first step | Collect payslips, your contract, emails about work hours, and any ABN/invoicing details |
| 2. Seek Anonymous Advice | Situations where you are unsure or fear retaliation | Contact the Fair Work Ombudsman (FWO) on 13 13 94 for a confidential discussion |
| 3. Report to the FWO | Clear-cut cases of exploitation or when advice confirms your suspicion | The FWO can investigate, enforce penalties, and recover unpaid wages on your behalf |
| 4. Get Legal Advice | Complex situations or when large sums of money are owed | An employment lawyer can represent you and provide specific legal strategies |
Best Options for Your Situation
- Best for quick clarification: Call the Fair Work Ombudsman
- Best for taking formal action: Contact the team at Fair Workplace Solutions for legal advice.
Troubleshooting Common Concerns
Problem: I’m afraid I’ll be fired if I raise this.
Solution: It is illegal for an employer to take adverse action against you for enquiring about your rights. This is protected under the Fair Work Act. Your initial enquiries to the FWO can be anonymous.
What is the 80% Rule for Sole Traders in Australia?
The “80% rule” is a tax rule, not an employment law rule. It states that if a contractor earns 80% or more of their income from one client in a financial year, they may not be able to claim all their business deductions unless they get a Personal Services Income (PSI) determination from the ATO.
While failing the 80% rule is a strong indicator that you might be an employee for tax purposes, it does not automatically define you as an employee under the Fair Work Act. However, it is a significant red flag that strengthens the case for an employment relationship.
Take Action Today
Sham contracting undermines fair work standards and costs Australian workers millions in unpaid entitlements each year. If you’ve worked through this guide and believe you’re in a sham contracting arrangement, don’t wait to take action.
Start by documenting your working arrangement, then reach out to Fair Workplace Solutions for confidential advice. Remember, knowing your rights is the first step to protecting them.