iscover ATO, FWO intensify crackdown on sham contracting
BusinessThe ATO and Fair Work Ombudsman are ramping up their focus on sham contracting, with a number of investigations already on foot in sectors such as building and construction.
In a joint statement, the ATO and Fair Work Ombudsman have warned employers that sham contracting is currently a major focus for both regulators at the moment, with community insights and intelligence revealing concerning patterns of behaviour across several industries.
FWO reminded employers that sham contracting occurs when an employer misrepresents to a worker that an employment relationship is an independent contracting arrangement when the employer doesn’t reasonably believe this.
“This might be done in an attempt to avoid paying entitlements such as super, leave and workers’ compensation. This practice undermines or ignores workers’ rights and disadvantages honest businesses,” it said.
ATO Assistant Commissioner Tony Goding said recent data had continued to uncover behaviour in industries including building and construction, and road freight, that did not contractually add up.
“Some businesses seem to think they can dodge their employee obligations, like paying super and other entitlements, simply by saying their employees are independent contractors. This doesn't pass the pub test; it's also illegal and we're shining a light on those trying to hide in the shadows,” said Goding.
‘If you’re treating workers like employees but calling them contractors, it may be illegal. That arrangement may not work out the way you might expect once the ATO and FWO have had a look.’
Fair Work Ombudsman Anna Booth said employers should be aware that FWO has investigations on foot into alleged sham contracting in sectors such as building and construction, and road transport.
‘We won’t hesitate to take enforcement action where we find unlawful activity in any sector,’ Booth said.
"We are pleased to be joining forces with the ATO to shine a spotlight on this unlawful practice that leaves workers worse off and can land employers in court, exposed to significant penalties.”
Booth reminded employers that it’s unlawful to mislabel a worker as a contractor when the business doesn’t reasonably believe this.
“Employers also must not knowingly say something false or misleading to convince an employee to become a contractor to do the same work, or dismiss an employee to engage them as a contractor to do the same work,” she said.
The Fair Work Act imposes strong penalties for sham contracting, with courts able to impose penalties up to $19,800 for individuals, $99,000 for businesses operating with 15 or less employees, and for larger businesses, the greater of either $495,000 or three times the underpayment amount.
In addition to the penalties imposed by the Fair Work Act, businesses who incorrectly treat an employee as an independent contractor risk other penalties and charges, including PAYG withholding penalty, super guarantee charge and super guarantee penalties.
Goding said the ATO now has much visibility of payments made to contractors each year through the taxable payments annual reporting (TPAR).
TPAR is used by the ATO to see payments made to contractors each year, matching industry data with tax returns, ABN records, super reporting and Single Touch Payroll to flag contractors working almost exclusively for one business and individuals with an ABN that fail to declare their income or lodge a tax return.
According to Goding, this level of visibility “makes it harder for those trying to avoid their obligations.”
He continued: “We’re working with the FWO and other regulators as part of the Shadow Economy Taskforce to ensure workers and honest businesses aren’t being taken for a ride.”
“The ATO-led Shadow Economy Taskforce is constantly sharing intelligence across our agencies, including almost 1,000 community tip-offs we receive every week from people who know or strongly suspect tax evasion behaviours including sham contracting. Tip-offs come in from workers, customers and competitors.”
The ATO received over 800 tip-offs concerning the road freight industry in 2024-25, and nearly a quarter regarded sham contracting.
Goding added: “Businesses that think they can get away with dressing employees up as contractors should know that our extensive data-matching and community tip-offs are shining a bright spotlight their way.”
“For workers who are treated as contractors even though they’re really employees, you’re the one who’s really missing out - on super, overtime, public holiday penalties, allowances, leave entitlements and basic workplace protections you should rightfully have,” Goding concluded.
Booth advised workers with concerns they may be in a sham contracting arrangement to contact the Fair Work Ombudsman directly and seek assistance.
Amelia is a Professional Services Journalist with Momentum Media, covering Lawyers Weekly, HR Leader, Accountants Daily and Accounting Times. She has a background in technical copy and arts and culture journalism, and enjoys screenwriting in her spare time.
