Sham contracting is the unlawful practice of representing an employee as a contractor in order to avoid paying employee entitlements. This includes commencing an employment relationship under an independent contractor agreement, dismissing or threatening to dismiss an employee in order to re-engage them as an independent contractor, or knowingly making a false statement to induce an employee (or former employee) into an independent contractor agreement for work they are or were doing as an employee.

There are many significant distinctions between employees and contractors, for example, there are many employee entitlements that a contractor does not receive. This includes (in the majority of cases) entitlements to leave and loadings. Superannuation is another entitlement owed to employees, whereas contractors are only entitled to superannuation if their contract is ‘wholly or principally for labour’.

The basic legal distinction between an employee and a contractor is this: an employee is engaged under a contract of service whereas a contractor is engaged under a contract for services. However, there are many circumstances where there is a fine line between a worker being an employee and an independent contractor, and the courts have grappled with this distinction over a number of decades.

Up until very recently, the Courts have generally looked at the ‘totality of the relationship between the parties’ by reference to the terms of the contract and the way in which the work is actually carried out. This test, known as the multifactorial test, involves the examination of a range of factors to determine the nature of the relationship.

Independent Contractor or an Employee

However, in two high-profile cases in 2022, CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek), the High Court provided clarification on the tests required to determine whether a worker is an employee or a contractor.

In Personnel Contracting, the High Court held that a labourer engaged by a labour hire company was an employee of the labour hire company and not an independent contractor, despite the services agreement into which the parties entered identifying the labourer as a ‘contractor’. Critical to the High Court’s reasoning was that the services agreement provided for a ‘complex suite of rights and obligations’ between the labour hire company and the labourer, including terms that allowed the labour hire company to retain a right of control over the labourer and the performance of his work.

In Jamsek, on the other hand, the High Court held that two truck owner-drivers who provided transport services to a company pursuant to independent contractor agreements were independent contractors. The High Court had regard to the terms of the contract and the context in which the independent contractor agreements were entered into. In holding that the drivers were not employees of the company, the High Court relied on the drivers having established partnerships, and the partnerships and the company being the contracting parties to the independent contractor agreements.

Following these two cases, the primary consideration is once again the terms of the contract between the principal and the worker. Specifically, the High Court determined that where the terms of a valid written contract (which are not varied, waived or subject to estoppel) deal comprehensively with the rights and obligations of the parties, it is unnecessary and inappropriate to examine other aspects of the relationship between the parties, including their post-contractual conduct, in determining the legal relationship between them. The multifactorial test previously established by the Courts is applied only within the context of the contractual terms. In short, the relationship between the parties should be determined by reference to the rights and obligations under the contract and not any ‘label’ that the parties might seek to attach to the relationship.

These two decisions reinforce the importance of parties clearly and comprehensively documenting their rights and obligations (and any variation to those rights and obligations) in a written contract to minimise the risk of any later disputes about the nature of their legal relationship.

Fair Work Act and Sham Contracting Arrangements

Sham contracting arrangements are subject to significant civil penalties under the Fair Work Act 2009 (Fair Work Act). This means that certain people, including the workers exposed to the sham contracting arrangement, may apply to the Federal Court, the Federal Circuit and Family Court of Australia or an eligible State or Territory Court for relief in relation to the contravention. The Courts may order such relief as an injunction to prevent, stop or remedy the effects of a contravention, compensation for the loss suffered by the person affected by the contravention and an order for reinstatement of a person.

These civil penalties for employers are set to increase significantly under the Commonwealth’s Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 (Bill). The Bill, introduced on 4 September 2023 and currently before the Senate Education and Employment Legislation Committee for inquiry and report by 1 February 2024, is also intended to undo the common law tests in Personnel Contracting and Jamsek in the context of the Fair Work Act. This is by way of a new definition of ‘employee’ and ‘employer’ that reverts back to the multifactorial test. The proposed section 15AA of the Bill sets out the manner for determining the meaning of employee and employer for the purposes of the Fair Work Act, by ‘ascertaining the real substance, practical reality, and true nature of the relationship’. Importantly, ‘regard must be had not only to the terms of the contract governing the relationship, but also other factors relating to the totality of the relationship including, but not limited to, how the contract is performed in practice.’

This codification of the multifactorial test will only apply in the context of the Fair Work Act. This means that even if the Bill becomes law, the contractual primacy test applied in Personnel Contracting and Jamsek will continue to apply under other workplace, taxation and superannuation laws, to the extent that those laws adopt the ordinary meaning of employee and employee.

How can MV Law assist?

If you suspect you are a victim of sham contracting, seek legal advice. MV Law’s Employment Lawyers will offer clear advice on any employment issues, including employment contracts or legal representation if needed. MV Law, based in Canberra, can provide assistance to independent contractors, employees and employers in ACT and NSW and ensure your rights and entitlements are protected. Contact our Employment Law Team in Canberra if you require help with any aspect of employment law, including sham contracting or drafting an employment contract.


Amy Sydney
Special Counsel, Employment Law
MV Law Canberra
(02) 6279 4444