If you employ staff or engage contractors, it’s worth taking a fresh look at how your workers are classified – because the ATO and Fair Work Ombudsman have publicly confirmed an increased focus on sham contracting.
This follows recent enforcement activity reported in the media, including a case where a business was hit with a penalty of more than $200,000 after worker arrangements were found to be non‑compliant. While most small businesses aren’t deliberately doing the wrong thing, the risk is that long‑standing habits (like “they have an ABN so they’re a contractor”) can leave you exposed.
This article explains what sham contracting is, why regulators are paying closer attention, and what practical steps you can take to reduce risk.
What is “sham contracting”?
Sham contracting is where a business misrepresents an employment relationship as an independent contracting arrangement. This may be done (intentionally or unintentionally) to avoid employee obligations such as superannuation, leave and workers’ compensation.
A key point: the label isn’t what matters. Simply calling someone a contractor – or having them invoice you with an ABN – does not automatically make them a contractor for tax and workplace law purposes.
Why the ATO is increasing its focus (and why it matters)
The ATO and Fair Work Ombudsman have stated they are ramping up their focus on sham contracting, using intelligence from community information, tip‑offs and data analysis to identify patterns that “don’t add up”.
One of the strongest indicators that this is a real focus area is the volume of intelligence coming in:
- The ATO‑led Shadow Economy Taskforce received more than 7,000 tip‑offs in the building and construction industry in the 2024–25 financial year, with around 20% related to suspected sham contracting.
- Regulators have also flagged concerns in industries such as road freight, where reported arrangements may not align with the data they hold.
For small business owners, the takeaway is simple: worker classification is being actively monitored, and it’s easier than ever for mismatches to be detected.
Contractor or employee? It’s about the reality of the arrangement
The ATO’s guidance makes it clear that correctly identifying whether a worker is an employee or an independent contractor impacts your tax, super and reporting obligations.
While every situation is different, common “red flags” that can indicate an employment‑type relationship include:
- The worker is directed on how, when and where the work is done (high control)
- The arrangement is ongoing and the worker is embedded in your business operations
- The worker is paid mainly for their time and labour rather than a defined result
- The worker is required to perform the work personally and cannot delegate it
Even where a worker is genuinely operating as a contractor, superannuation obligations can still apply in some cases – particularly where the contract is mainly for the worker’s labour.
A common blind spot: super for contractors (yes, it can still apply)
One of the biggest misconceptions we see is: “They’re a contractor, so we don’t pay super.”
The ATO specifically warns that you may still need to pay super for an independent contractor if they are paid mainly for their labour – and this can apply even if they have an ABN.
The ATO explains that you may have super obligations where the contractor is engaged under a contract that is mainly for their labour, is paid for their personal labour/skills (not a specified result), and cannot delegate the work.
This is exactly why classification reviews matter: it’s not just a “Fair Work issue” – it can also create super guarantee and tax exposure.
What happens if you get it wrong?
Where sham contracting is found, regulators have made it clear they will take enforcement action.
The potential consequences can include:
- Back payment of unpaid super and other entitlements (where applicable)
- Interest and administrative costs associated with rectifying the issue
- Significant penalties, including maximum court‑ordered penalties of:
- $19,800 for individuals
- $99,000 for businesses with fewer than 15 employees
- For businesses with 15 or more employees, the greater of $495,000 or three times the underpayment amount
And as noted earlier, recent media coverage has highlighted cases where penalties have reached six figures, reinforcing that this is not a minor compliance issue.
Practical steps to reduce your risk (without overcomplicating it)
If your business engages contractors (or has shifted staff into contractor arrangements), here are practical steps that can make a meaningful difference:
1) Review your contractor list
Start with who you pay regularly and who works primarily for your business. (These are the arrangements most likely to draw attention.)
2) Check your contracts and onboarding approach
Ensure your documentation aligns with the ATO’s employee vs contractor guidance and clearly reflects the intended relationship.
3) Reassess superannuation obligations
Where contractors are mainly paid for labour, you may have super obligations even if they invoice you and have an ABN.
4) Fix issues early
If something doesn’t look right, early action generally gives you more options and reduces the likelihood of larger adjustments later.
Further Reading (ATO resources)
If you’d like to explore the official guidance, these ATO resources are a helpful starting point:
- Employee or independent contractor (ATO) – guidance on working out worker status and obligations
ATO: Employee or independent contractor - Super for independent contractors (ATO) – when super may still be payable to contractors
ATO: Super for independent contractors