The Australian Taxation Office (ATO) is cracking down on businesses exploiting contractors for financial benefits, with many business owners potentially facing heavy penalties for engaging in ‘sham contracting.’ Sham contracting is when an employer tries to disguise an employment relationship as an independent contracting arrangement to avoid paying legal minimum rates of pay and other entitlements like annual leave and sick leave.

Businesses need to be fully aware of the potential dangers when hiring contractors. From a legal perspective, there a number of things that can help determine the difference between an employee and a contractor.

Employees usually:

  • Do ongoing work that is controlled by the employer;
  • Work hours they’re told to work by their employer;
  • Are entitled to superannuation from their employer.

Independent contractors usually:

  • Pay their own superannuation and tax, including GST;
  • Decide what hours to work;
  • Invoice for their work or get paid at the end of the contract or project.

There are also two key ways to distinguish an employee from a contractor. Firstly, the principal cannot have control over the manner in which the contractor undertakes tasks on a day to day basis (often referred to as the “control test”). Secondly, if a full-time worker provides services that would allow them to be in business for themselves, then they are more likely to be considered a contractor, not an employee.

Key considerations for businesses to ensure compliance include:

  • Reviewing the contracting arrangement to ensure they are properly categorised;
  • Seek advice from a professional;
  • Become familiar with the legal tests to ensure you can correctly identify a true contracting arrangement, and understand the operation of the ‘sham contracting’ provisions under the Fair Work Act.

If you run a business and are being audited by the ATO in regards to your employee and contractor arrangements, contact our Lawyers at The Quinn Group who can provide you with guidance and advice. Submit an online enquiry at or call us on 02 9223 9166.