Sham Contracting in Australia: What It Is, the Penalties, and the Offshore Risk Nobody Checks

What is sham contracting?

Sham contracting is when a business engages someone as an independent contractor but the relationship is really employment. The contract says contractor. The day-to-day says employee. Under the Fair Work Act 2009 it's prohibited, and the label on the paperwork doesn't decide anything. What decides it is how the arrangement works in practice.

Most sham contracting happens by drift. You hire one person offshore for a few hours a week, the work goes well, you give them more, then more again, and eighteen months later they're full-time on your systems reporting to your ops manager. Nobody sat down and decided to misclassify anyone. That's exactly why it's so common.

Is sham contracting illegal in Australia?

Yes. The Fair Work Act prohibits misrepresenting an employment relationship as an independent contracting arrangement. It also prohibits dismissing or threatening to dismiss an employee so you can re-engage them as a contractor, and making knowingly false statements to push someone into contracting. The Fair Work Ombudsman can investigate and take the matter to court.

There's a defence where a business reasonably believed the arrangement was genuine contracting. It's harder to rely on than most people assume, and a contract that insists loudly on "contractor" status while everything else points the other way tends to undermine it.

Who is liable, the business or the worker?

The business. Sham contracting provisions are aimed at the party engaging the worker, and individuals involved in the contravention, such as directors or managers, can be pursued as well. The worker doesn't carry a penalty for accepting a contractor label. They're the one with a claim.

What are the penalties for sham contracting?

Sham contracting provisions are civil remedy provisions, so courts can order penalties per contravention, with higher maximums for companies and for serious contraventions. The penalty is often the smaller part. Back pay for award wages, leave, penalty rates and overtime, unpaid superannuation with the super guarantee charge, and PAYG withholding issues can add up to more than the fine.

Penalty unit values change, so check the current maximums on the Fair Work Ombudsman's sham contracting page rather than trusting a figure from an old article, this one included.

How is classification actually tested?

Courts look at the whole relationship, and since the 2024 Fair Work changes that means the real working relationship as it plays out, beyond just the written contract. Control is the big one. Do you decide when they work, how they work and what they work on, or do you buy a result and let them deliver it their own way? Then integration: are they part of your business, on your org chart, in your standups, with your email address, or are they running their own business that happens to have you as a client?

After that, the practical markers. Whose tools and systems get used. Whether they can subcontract or send someone else. Whether they carry any commercial risk if the work goes badly. Whether they have other clients. Whether they invoice for deliverables or receive what looks and behaves like a wage on a fixed cycle.

Answer those honestly about the person you're thinking of right now. Most people already know the answer before they finish reading the list.

Six signs your contractor is really an employee

You set their working hours or require them to be online during yours. They use your email, your CRM, your project tool and your logins. You're their only client, or you've never checked. The engagement has no end date. You pay a fixed amount on a fixed cycle rather than against invoices for deliverables. You'd manage a performance problem with them the way you'd manage it with a staff member.

One of those on its own means little. Four or more and the label on the contract is doing work it can't do. If you want it scored properly, the free classification check takes about a minute.

Does sham contracting apply to offshore workers?

The principle travels. The mechanics shift. Businesses assume that because the person lives in Manila or Cebu, none of the rules reach them. Sometimes that assumption holds. Often it doesn't, and the way you'd find out is a claim, an audit or a departing staff member who read something online.

The bigger issue is that offshore hiring removes the accidental guardrails you'd have onshore. No payroll system asks you what the person's classification is. No accountant flags a superannuation gap. The money leaves as a bank transfer and nothing in the process ever prompts the question.

What does the Philippines side look like?

The Philippines has its own regularisation concept. Where a worker performs work that's necessary to the employer's usual business, on an ongoing basis, they can be treated as a regular employee with the protections that come with that. Those protections include SSS, PhilHealth and Pag-IBIG contributions, 13th month pay, leave entitlements and separation rules.

A worker who has spent two years being called a contractor while functioning as an employee can raise that, and the arrangement gets assessed on substance the same way it would in Australia. So the exposure runs on both sides of the arrangement at once.

How do you fix it without losing the person?

Two real options. Make the independence genuine, which means they use their own tools, set their own hours, take other clients and invoice for defined deliverables. That works for some roles and is honestly unworkable for most core team members, because the reason you want them is that they're embedded in how you operate.

Or move the employment somewhere it can legally sit. An Employer of Record with a Philippines entity employs the person properly, runs payroll, handles the statutory obligations and holds the classification risk. The person keeps doing the same job for the same money. From your side, the only visible change is who the contract is with and an invoice instead of a bank transfer.

Worth saying to the team as well: for a Filipino professional who has been contracting for years, moving onto a real employment contract with benefits and 13th month pay is usually good news. It tends to help retention more than Australian employers expect.

Official sources

• Fair Work Ombudsman: Sham contracting
• ATO: Employee or independent contractor
• Philippines Department of Labor and Employment (DOLE)