Sham Contracting Crackdown: Calling someone a contractor doesn’t make them one.
Last week the Australian Taxation Office and the Fair Work Ombudsman signalled an increased focus sham contracting where businesses incorrectly classifying workers as independent contractors.
This matters because if someone is legally an employee, they are entitled to protections under the Fair Work Act 2009 including:
🔹 minimum pay
🔹 leave entitlements
🔹 superannuation
🔹 unfair dismissal protection
But it’s not just an employment law issue.
The ATO is also concerned because sham contracting can mean certain tax obligations are avoided or underpaid. For example, treating someone as a contractor rather than an employee can affect your PAYG withholding obligations.
This is why the ATO and Fair Work regulators often share intelligence when reviewing contractor arrangements.
If a business labels someone a contractor but they are actually an employee, the potential exposure can include:
🔹 back payment of wages
🔹 unpaid superannuation
🔹 PAYG withholding liabilities
🔹 penalties for sham contracting
This issue has become even more important following changes introduced by the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024.
The law now focuses on the “real substance, practical reality and true nature of the relationship.”
In other words:
It’s no longer enough to rely on what the contract says.
Regulators will look at how the working relationship actually operates in practice.
For many businesses that rely on contractors, now may be a good time to review whether those arrangements still hold up under the new rules.
Here is a link to a simple checklist business owners can use to assess whether someone is more likely an employee or a contractor.
Wayne Wanders is an experienced Business Advisor and Outsourced CFO who can help to scale and grow your business profitably.
Contact Wayne on wayne@arealcfo.com.au or 0412 227 052.
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