ATO, FWO intensify crackdown on sham contracting

Australian regulators are increasing their focus on sham contracting, with both the Australian Taxation Office (ATO) and the Fair Work Ombudsman (FWO) stepping up investigations across several industries.

Sectors such as building and construction and road freight are already under scrutiny, and regulators are warning businesses that misclassifying workers as contractors instead of employees could lead to serious consequences.

What Is Sham Contracting?

Sham contracting occurs when a business tells a worker they are an independent contractor when they are actually an employee.

Sometimes this is done to avoid paying employee entitlements such as:

• Superannuation
• Paid leave
• Overtime or penalty rates
• Workers’ compensation

But according to the regulators, simply calling someone a contractor doesn’t make it true. If the working arrangement looks like employment, the law may treat it as employment.

Why Regulators Are Paying Attention

The ATO and FWO say they are seeing concerning patterns of behaviour across multiple industries where workers appear to be treated as employees but are labelled as contractors.

Tony Goding from the ATO warned that some businesses believe they can avoid obligations by reclassifying workers.

“Some businesses seem to think they can dodge their employee obligations simply by calling workers contractors. If you’re treating workers like employees but calling them contractors, that arrangement may not stand up once regulators review it.”

The FWO has confirmed that active investigations are already underway, and enforcement action will be taken where unlawful practices are found.

What the Law Says

Under the Fair Work Act 2009, it is illegal for businesses to:

• Misrepresent an employment relationship as contracting
• Provide false or misleading information to convince a worker to become a contractor
• Dismiss an employee and then rehire them as a contractor to do the same work

These rules are designed to protect workers and ensure businesses compete fairly.

Potential Penalties

Businesses that engage in sham contracting can face significant penalties.

Courts may impose fines of up to:

• $19,800 for individuals
• $99,000 for small businesses (15 or fewer employees)
• $495,000 or three times the underpayment amount for larger businesses

On top of these fines, businesses may also face additional liabilities from the ATO, including:

• PAYG withholding penalties
• Superannuation guarantee charges
• Superannuation penalties

How the ATO Is Detecting Issues

The ATO now has greater visibility over contractor payments through the Taxable Payments Annual Reporting system (TPAR).

This system allows the ATO to compare contractor payments with:

• Tax returns
• ABN records
• Superannuation reporting
• Single Touch Payroll data

This means regulators can identify situations where:

• Contractors work almost exclusively for one business
• Individuals fail to report contractor income
• Contractor arrangements don’t match employment patterns

In addition, the ATO receives around 1,000 tip-offs each week from workers, customers and competitors reporting suspected tax evasion or sham contracting.

These reports are shared across agencies through the Shadow Economy Taskforce.

Why This Matters for Businesses

Sham contracting not only exposes businesses to penalties—it can also damage reputation and create financial risk.

More importantly, regulators say the practice undermines workers’ rights and disadvantages honest businesses that follow the rules.

Employers should ensure that their worker arrangements are genuinely structured as either employment or independent contracting, based on how the work is actually performed—not just what the contract says.

A Message for Workers

Workers who are incorrectly treated as contractors may be missing out on important entitlements such as:

• Superannuation
• Overtime pay
• Public holiday penalties
• Leave entitlements
• Workplace protections

Anyone concerned about their working arrangement can contact the Fair Work Ombudsman for advice or support.

Why Businesses Should Review Their Arrangements

With the ATO and Fair Work Ombudsman working together and using advanced data-matching systems, it is becoming much harder for businesses to hide sham contracting arrangements.

For employers, now is a good time to review worker classifications and ensure they comply with the law.

For more information or help reviewing your worker arrangements, call us on 07 3483 0100 or send our team a message for guidance.