Sham Contracting Australia (2026): Test and Penalties

Sham contracting is when a business tells a worker they are an independent contractor when, in reality, they are an employee. Under sections 357 to 359 of the Fair Work Act it is unlawful unless the business reasonably believed the worker was a contractor. Courts can impose penalties of up to $546,000 per contravention on larger businesses.

Building and construction is a focus area: in March 2026 the ATO and Fair Work Ombudsman announced a joint push on sham contracting, naming construction and road freight as industries where arrangements "don't contractually add up". This guide covers the law, the 2024 changes, penalties and a practical checklist for builders. General information, not legal advice.

What counts as sham contracting under the Fair Work Act?

The Fair Work Ombudsman's sham contracting page describes three prohibited behaviours:

• Misrepresentation: telling or representing to a worker that they are a contractor when they are actually an employee, unless the business reasonably believed they were a contractor.
• False statements: knowingly saying something false to convince an employee to become a contractor to do the same, or mostly the same, work.
• Dismissal to re-engage: dismissing or threatening to dismiss an employee so they can be engaged as a contractor for the same, or mostly the same, work.

The classic site version: a labourer is told to "get an ABN, send us an invoice every Friday", then works set hours under the supervisor's direction, with the builder's tools, at an hourly rate. Calling that contracting does not change what it is.

What changed in 2024?

Two Closing Loopholes changes reshaped this area:

• 27 February 2024 — tougher defence. The old "recklessness" defence was replaced with a reasonableness test. A business must now prove that, when it made the representation, it reasonably believed the worker was a contractor.
• 26 August 2024 — new definition of employment. Constitutionally covered businesses (generally companies with Pty Ltd or Ltd in their name) now use the "whole of relationship" test, which looks at the real substance, practical reality and true nature of the relationship, including how the contract works in practice and not only what it says.

Sole traders and partnerships in New South Wales, Victoria, Queensland, South Australia and Tasmania generally still use the "start of relationship" test, which focuses on the written contract. Since 1 July 2026, contractors earning above the contractor high income threshold of $190,100 can opt out of the whole of relationship test in writing.

The Fair Work definition does not change the separate meaning of "employee" for tax, super or workers compensation. The ATO, for example, treats labourers and trades assistants as employees for tax and super purposes regardless of the label used.

What are the penalties for sham contracting?

These are the figures published by the Fair Work Ombudsman as at July 2026; penalty amounts are indexed, so check the current page. On top of that, the ATO's page on employees incorrectly treated as contractors lists PAYG withholding penalties and the super guarantee charge, with additional penalties of up to 200 per cent of the charge. Since 1 January 2025, intentionally underpaying wages or entitlements can also be a criminal offence. Directors, managers and other businesses knowingly involved can be held liable as accessories.

What is the sham contracting test?

There is no single question that settles it. Both the Fair Work Ombudsman and the ATO look at a group of factors together:

An ABN, an invoice or a contract titled "subcontract agreement" is not decisive. The Fair Work Ombudsman says plainly that a worker with an ABN who issues invoices is not automatically a contractor.

What does sham contracting cost a small builder?

Take a hypothetical builder in Werribee who engages two labourers on ABNs at $42 an hour, 38 hours a week, for 40 weeks. Each is directed daily, uses the builder's tools and works only on the builder's sites. If those labourers are found to be casual employees, the exposure can include unpaid super at 12 per cent on roughly $63,800 of earnings each (about $7,660 per worker before the super guarantee charge's interest, fee and penalties), any award shortfall such as allowances and overtime penalties, PAYG withholding penalties, a workers compensation premium adjustment, and a Fair Work penalty of up to $109,200 per contravention for a business with fewer than 15 employees. The "saving" from skipping payroll rarely survives that maths.

Sham contracting checklist for builders

Run through these red flags before engaging anyone on an ABN:

1. Is the worker paid by the hour or day rather than a quoted price for a defined scope?
2. Will your supervisor tell them what to do each morning?
3. Are you supplying the tools, materials and PPE?
4. Would they be unable to send someone else in their place?
5. Are they working only for you, week after week?
6. Did you ask them to get an ABN so you could engage them?
7. Were they previously your employee doing the same work?
8. Is the role on the ATO's always-employee list: labourer, trades assistant, apprentice or trainee?

Two or three "yes" answers mean you should stop and get advice. Six or more, and you are very likely describing an employee.

How do you avoid sham contracting on a building job?

• Employ labourers as casuals or part-timers under the Building and Construction General On-site Award, with payslips, super and workers compensation cover. Our casual loading guide shows how casual rates are built.
• Use genuine subcontractor businesses for defined scopes, quoted prices and their own insurance, and record payments for your taxable payments annual report, due 28 August each year.
• Use a licensed labour hire provider where your state requires one; see do I need a labour hire licence.
• Review existing arrangements whenever the actual work changes. A contractor relationship that has drifted into daily direction and set hours may now be employment.

The cost gap is smaller than many expect. Super applies to contractors paid wholly or principally for labour, so the main savings people chase usually come with legal risk attached. The subcontractor vs employee comparison runs the numbers.

How to hire labour on Yakka without the guesswork

Yakka Labour is a marketplace where builders and businesses post jobs and workers apply directly; it is not the workwear brand with a similar name. Yakka is not an employer or labour hire agency, so classification is a decision for the hirer and worker. A clean process looks like this:

1. Post the job with the suburb, start time, tickets required and the AUD rate.
2. Decide up front whether the engagement is casual employment or a genuine subcontract for a defined scope.
3. Put the agreed rate and arrangement in writing in the job thread.
4. Pay through the platform and keep your own payroll, super and insurance obligations current.

Browse labourers near your site on the general labourer hub.

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