What are the general protections against sham contracting?

Authored by Clare Parsons, Associate and Anthony Forsyth, Consultant, Corrs Chambers Westgarth. Updated by the LexisNexis Legal Writer team.

What is sham contracting?

“Sham contracting” occurs where an employment relationship (contract of service) is disguised as an independent contracting arrangement (contract for services). Sham contracting may be undertaken for a variety of reasons, including to deprive employees of entitlements or to avoid or reduce taxation liability.

Part 3-1, Div 6 of the Fair Work Act 2009 (Cth) (FW Act) outlaws specific sham contracting arrangements so as to protect genuine employees (see below). Contravention of these provisions may expose an employer to civil penalties, and the imposition of orders to pay an employee’s unpaid wages, leave entitlements, superannuation, as well as payroll tax and income tax deductions.

Practice Tip: The most common form of sham contracting is when a contract is structured to resemble a contractor relationship rather than an employment relationship. See Guidance Note: Employee/independent contractor distinction. It can also occur when a worker’s personal services company contracts with the employer, rather than the worker in his or her individual capacity. Employers should take care when entering into these types of work relationships to avoid potential liability under Pt 3-1, Div 6 of the FW Act.

What are the prohibitions against sham arrangements?

The FW Act prohibits three types of sham arrangements.