Sham contracting is when a business tells a worker they are an independent contractor when they are an employee, and doesn't reasonably believe the worker is a contractor. It is illegal. Whether you are a contractor or an employee depends on the whole working relationship, including how the work is done in practice. Having an ABN and sending invoices doesn't make you a contractor.
Updated 27 October 2026.
Sham contracting at a glance
| What you want to know | What Fair Work says |
|---|---|
| What sham contracting is | A business tells a worker they are a contractor when they are an employee, and doesn't reasonably believe the worker is a contractor |
| Which test decides | The whole of relationship test, since 26 August 2024, for a business with "Pty Ltd" or "Ltd" in its name. It weighs the contract and how the work is done in practice |
| The signs of an employee | Works under the business's direction, carries no financial risk, uses the business's tools, has to do the work personally, works set hours and expects the work to continue |
| The signs of a contractor | Controls their own hours, location and methods, carries the profit or loss on each job, uses their own tools, can delegate the work and is engaged for a specific task |
| What an ABN means | Nothing on its own. A worker with an ABN or invoices isn't automatically a contractor, and there usually won't be one deciding factor |
| Maximum penalty for each breach | $21,840 for an individual, $109,200 for a business with fewer than 15 employees, $546,000 for a business with more than 15 employees |
| The law | Fair Work Act 2009, sections 357 to 359, with the penalties under section 539 |
| Where to get help | Fair Work's advisers, 8 am to 5:30 pm Monday to Friday, if you think you are in a sham arrangement. Fair Work can't rule on which you are, and recommends legal advice for that |
What counts as sham contracting?
The Fair Work Ombudsman says it is illegal for a business to
- tell or represent to a worker that they are a contractor when it doesn't reasonably believe that
- knowingly say something false to convince an employee to become a contractor doing the same, or mostly the same, work
- dismiss an employee, or threaten to, in order to engage them as a contractor doing the same, or mostly the same, work
It says these arrangements are sometimes set up to avoid paying employees their legal entitlements, such as minimum pay rates and paid leave, which contractors don't get.
Fair Work's own example is a worker hired for 12 months to cover an employee on parental leave. Before he starts, he is told he will be a contractor, needs an ABN and must invoice to get paid. He will work under the owner's direction, at set hours, with the company's tools, carrying no profit or loss and unable to delegate the work. The owner says he can't be an employee because the job is short term, knowing he could employ him on a fixed term contract. Our guide to fixed term contracts covers that option.
What are the penalties for sham contracting?
A court can order penalties against the business or the people involved. The maximum for each breach is
| Who | Maximum penalty for each breach |
|---|---|
| An individual | $21,840 |
| A business with fewer than 15 employees | $109,200 |
| A business with more than 15 employees | $546,000 |
How do you tell if you are a contractor or an employee?
Since 26 August 2024, constitutionally covered businesses use the whole of relationship test. That usually means a business with "Pty Ltd" or "Ltd" in its name. The test looks at the real substance, practical reality and true nature of the relationship: the terms of the contract and how the work is done in practice. If there is an employment relationship, you are an employee.
Fair Work lists the factors to weigh
| Factor | Points to an employee | Points to a contractor |
|---|---|---|
| Control | Works under the employer's direction, including hours, location and how the work is done | Controls their own hours, location and how they do the work |
| Financial risk | Carries none: paid even if the business makes a loss on the job | Carries the risk of a profit or loss on each job, and usually has their own insurance |
| Tools and equipment | Provided by the employer, or a tool allowance is paid | Uses their own |
| Delegating the work | Has to do the work themselves | Can delegate or subcontract it |
| Hours | Works standard or set hours (a casual's may vary) | Decides the hours needed to finish the task, by agreement |
| Ongoing work | Usually expects work to continue | Usually engaged for a specific task |
No single factor decides it, and all of them count. Fair Work says a worker who has an ABN or issues invoices isn't automatically a contractor, and the type of work doesn't decide it either. Its example is a cleaner called a contractor who wears the business's logo shirt, fills in timesheets, cleans the way the owner tells him, uses the owner's supplies, works 3 set shifts a week at a fixed hourly rate and can't subcontract the work, even though he invoices monthly. Looking at all of that, he concludes he is an employee.
Sole traders, partnerships and other businesses that are in the national system because New South Wales, Queensland, South Australia, Tasmania or Victoria referred its powers still use the older start of relationship test, which focuses on what the parties agreed in the contract. Constitutionally covered businesses also use it for work done before 26 August 2024.
Can a well paid contractor opt out of the test?
Yes. A worker who earns more than the contractor high income threshold, $190,100 from 1 July 2026, can give the business a written notice opting out of the whole of relationship test. The start of relationship test then applies from that date, which may mean you are treated as a contractor where the whole of relationship test would have made you an employee.
You can withdraw the notice in writing at any time, and the whole of relationship test applies again from that day. You can give only one opt out notice per relationship. A business that thinks you may be an employee under the whole of relationship test can tell you in writing that you can opt out, and you then have 21 days to give the notice.
What about tax and super?
The Australian Taxation Office decides employee or contractor for tax and super using the legal rights and obligations in the contract, following two High Court decisions in 2022. The label in the contract, such as "independent contractor", doesn't decide it. The question is whether the worker serves in the business as its representative or provides services to it while running their own business.
Some contractors must be paid super as if they were employees. The ATO says that includes a worker whose contract is wholly or principally for their labour.
What do contractors get?
Contractors don't get employee entitlements such as minimum pay rates or paid leave. Their pay and conditions are whatever the contract says. They still have some protections under the Fair Work Act, including from adverse action and coercion.
A contractor who earns less than the contractor high income threshold, with a services contract made on or after 26 August 2024, may be able to apply to the Fair Work Commission about unfair terms in that contract.
What should you do if you think you are an employee?
In Fair Work's examples, the worker reads its factors against their own contract and how the work runs day to day, and raises it with the business. Fair Work can't tell you whether you are a contractor or an employee, and recommends legal advice for that. It can help if you think you are in a sham contracting arrangement: you can call its advisers between 8 am and 5:30 pm, Monday to Friday.
What does sham contracting mean?
It means a business calls a worker an independent contractor when the worker is an employee, and the business doesn't reasonably believe the worker is a contractor. The Fair Work Ombudsman says these arrangements are sometimes set up to avoid paying employees their legal entitlements. It is illegal under the Fair Work Act.
What does Fair Work say about sham contracting?
The Fair Work Ombudsman's page says it is illegal to represent to a worker that they are a contractor when the business doesn't reasonably believe it, to knowingly say something false to convince an employee to become a contractor doing the same work, or to dismiss or threaten to dismiss an employee in order to engage them as a contractor. The page points to sections 357 to 359 and 539 of the Fair Work Act 2009. Fair Work can't tell you which you are, and says legal advice is the best way to find out.
Can you be an employee if you have an ABN?
Yes. Fair Work says a worker who has an ABN or issues invoices isn't automatically a contractor, and there usually won't be one deciding factor. What matters is the whole relationship, including how much control the business has over the work, who carries the financial risk, whose tools you use and whether you can delegate the work.
How do you report sham contracting?
If you think you are in a sham contracting arrangement, the Fair Work Ombudsman says it can help, and you can call its advisers between 8 am and 5:30 pm, Monday to Friday. It can't rule on whether you are a contractor or an employee, so for that question it recommends legal advice.
This is general information, not legal or financial advice. Whether you are a contractor or an employee depends on your circumstances, so get advice on your own situation.
Sources
- Fair Work Ombudsman, Sham contracting (what is illegal, why it happens, the maximum penalties, the parental leave cover example, calling an adviser, the page's source reference to sections 357 to 359 and 539 of the Fair Work Act 2009, content last updated 6 July 2026, read 10 October and again 27 October 2026)
- Fair Work Ombudsman, Independent contractors (the 26 August 2024 change, which businesses use which test, the factors, content last updated 24 October 2025, read 10 October and again 27 October 2026)
- Fair Work Ombudsman, Whole of relationship test (the real substance test, the factors table, an ABN or invoices not deciding it, no one deciding factor, the cleaner example, content last updated 1 December 2025, read 10 October and again 27 October 2026)
- Fair Work Ombudsman, Opting out of the whole of relationship test (the contractor high income threshold of $190,100 from 1 July 2026, the written notice, withdrawing it, one notice per relationship, the 21 days, content last updated 1 July 2026, read 10 October and again 27 October 2026)
- Fair Work Ombudsman, Contractor entitlements and support (no employee entitlements, protections that apply, super when paid mainly for labour, unfair contract terms, what Fair Work can and can't help with, read 10 October 2026)
- Australian Taxation Office, Difference between employees and independent contractors (the contract-based test after the 2022 High Court decisions, labels not deciding it, serving in the business, super for contracts wholly or principally for labour, last updated 17 December 2024, read 10 October 2026)
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