Sham contracting is an illegal practice of an employer disguising an employment relationship as an independent contracting arrangement. An employer may do this as an attempt to avoid paying entitlements such as leave, superannuation and minimum wages.
Sham contracting is currently in the spotlight, with the Australian Taxation Office (ATO) and Fair Work Ombudsman (FWO) increasing their focus on this illegal practice, with community insights and intelligence revealing concerning patterns of behaviour across several industries.
In a recent joint media release, the ATO and FWO have warned trucking businesses, which are in the spotlight for this, that they could face significant penalties if workers are incorrectly classified as independent contractors. The trucking industry is already undergoing investigations into such alleged sham contracting.
Penalties
Under the Fair Work Act, courts can impose penalties against businesses or individuals who are engaging in sham contracting. The maximum penalties for each contravention are:
- $19,800 for individuals
- $99,000 for businesses with less than 15 employees
- $495,000 for businesses with 15 or more employees, or if greater – a penalty that is three times the underpayment amount
As an example, the FWO secured nearly $200,000 in penalties against a Sydney Health and Wellness research company after it terminated or threatened to terminate 3 workers’ employment in order to re-engage them as independent contractors to perform essentially the same work.
Apart from the penalties imposed by the Fair Work Act, businesses that incorrectly treat an employee as an independent contractor risk other penalties and charges, including:
- PAYG withholding penalty – for failing to deduct tax from worker payments and sending it to the ATO
- Super Guarantee Charge (SGC) – which is more than the super would have been paid if worker classification was correct.
- Additional Super Guarantee penalties of up to 200% of the SGC under the Superannuation Guarantee (Administration) Act 1992.
Annual Reporting
To identify sham contracting warning signs, Taxable Payments Annual Reporting (TPAR) provides the ATO with visibility of payments made to contractors each year. Data from businesses in road freight, construction, cleaning, courier, security, IT and other industries are matched against tax returns, ABN records, super reporting and Single Touch Payroll.
Such reporting helps identify warning signs including:
- Contractors who work almost exclusively for one business
- Individuals operating with an ABN, but failing to declare their income or lodge tax returns
The ATO is also being assisted by tip-offs, with over 800 being sent in regarding the road freight industry in 2024-25, with nearly 25% being specific to sham contracting.
As a result of data that is highlighting industries with a high involvement in sham contracting, such as the transportation industry, the ATO-led Shadow Economy Taskforce is cracking down on the attempts made by employers to address tax evasion and illegal employment practices.
For more information regarding the sham contracting crackdown, contact us via the link below.