Sham contracting occurs where an employer disguises an employment relationship as an independent contracting relationship. The vice of this conduct is that it unfairly deprives workers of the benefits of employment and undermines the effective operation of the system established by the Fair Work Act 2009 (Cth) (‘The Act’) and other industrial legislation. Engaging in sham contracting an offence under the Act.

Misrepresenting employment as independent contracting arrangement

A person who employs (or proposes to employ) someone under a contract of employment must not represent to that individual that the contract is a contract for services. This type of misclassification can lead to underpayment of staff and fines for employers as was found in Federal Circuit Court case Fair Work Ombudsman v Happy Cabby Pty Ltd & Graeme Paff (2013) 65 AILR.

A broader application was found in the High Court of Australia where it held that the prohibition against misrepresentations is not confined to the situation where an employer mispresents to the employee that they are performing work as an independent contractor for the employer. This decision overturned an earlier decision which held that an employer’s misrepresentation about the employee being an independent contractor for a third party (for example, a labour hire company) did not contravene the provision. The High Court reasoned that the former interpretation did little to achieve the provision’s apparent purpose of protecting individuals from being misled by their employer about their employment status.

Defence to contravention

A defence to contravention of the provision exists if the employer can prove that at the time the representation was made, the employer did not know and was not reckless as to whether the contract was a contract of employment and not one for services. The employer’s state of mind will be considered when the court assesses whether the employer was “reckless”.

Enforcement of sham arrangement provisions

These provisions are civil penalty provisions and their enforcement is by virtue of the Act. The standard of proof for establishing whether a sham arrangement did occur is that the court must be comfortably satisfied that it occurred.

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This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this update to specific issues or transactions. For more information or specific advice on your circumstances please contact