FWO cashed up to investigate and prosecute sham contract arrangements

The Federal government has announced the Fair Work Ombudsman will receive $2.3 million each year for the next 4 years to establish a dedicated unit to address sham contracting.

While part of the objective is to increase education and encourage compliance, the unit will also dedicate funds to investigation of and litigation against employers who are participating in sham contractor arrangements.

Sham contractor arrangements refers to a situation where a worker is being engaged as a contractor but is in fact an employee. The effect of this is that the employer avoids its usual employment obligations such as paid leave, notice and redundancy.

It is well established that courts will look further than the written agreement between the parties to determine the true nature of the working relationship. Considerations including who has effective control of how and when the work is done, whether the worker performs work for others and whether the worker can refuse or delegate the work all form part of the assessment of the true nature of the arrangement.

The Fair Work Act 2009 includes provisions relating to sham contractor arrangements and provides specific protections for workers including:

  • An employer cannot tell an employee they are an independent contractor
  • An employer cannot dismiss or threaten to dismiss an employee in order to engage them as an independent contractor to do the same (or mostly the same) work they performed as an employee
  • An employer cannot mislead or influence an employee to persuade them to work as an independent contractor.

    There are significant back-pay and penalties that can be imposed where employers are found to have breached these provisions. Examples include a $286,704 penalty imposed on a company and its director providing airport shuttle services[1], the Foodora case[2] where delivery drivers/riders engaged as contractors were found to be employees, and the Guest Tek case[3] where, despite an express written contractor agreement, the worker was an employee- in the words of Commissioner Bernie Riordan: “in the same way that if a bird looks like a duck, walks like a duck and quacks like a duck, then it is a duck, the [project manager] in this case is an employee”.

    In light of FWO’s increased focus on these activities now is a good time to consider how you engage your workers and ensure you are meeting your employment obligations.

    Lessons for employers

  • Ensure you assess the true nature of the relationship with your workers and that the written agreement reflects this arrangement
  • Consider the ongoing needs of the business and whether contractor engagement meets those needs
  • If you currently engage contractors, consider the elements for and against contractor v employee and document this process
  • If considering engaging a former employee as contractor, ensure you don’t breach the Fair Work Act
  • Be aware there is still a risk of sham contracting even where the employer and the worker agree to an independent contractor arrangement rather than employment
  • If unsure seek advice


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