Sham contracting is not a grey area. Under Australian law, calling someone a contractor when they are doing the work of an employee is illegal — full stop. The penalties from Fair Work Australia are significant, and they apply whether you did it deliberately or simply did not know the rules. In the construction, manufacturing, civil and warehousing sectors, where flexible workforce arrangements are common, this is one of the most important compliance questions operators face.
This is not legal advice. For your specific situation, talk to an employment lawyer or the Fair Work Ombudsman. What this article does is lay out the practical framework — the tests regulators apply, the patterns that attract scrutiny, and the questions you should be asking about how workers are engaged across your sites.
What is sham contracting?
Sham contracting happens when a business labels a worker as an independent contractor when, under the actual conditions of their work, they are legally an employee. It can happen three ways under the Fair Work Act 2009:
- Representing to a person who is an employee that they are engaged as a contractor
- Dismissing an employee and then re-engaging them as a contractor to perform the same or substantially similar work
- Making a false statement to persuade an employee to become a contractor
All three are prohibited. The intent of the business does not matter as much as the reality of the arrangement. If the working relationship looks like employment, Fair Work will treat it as employment.
The multi-factor test — how regulators actually assess it
Since the High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek (both 2022), the primary test in Australia focuses on the terms of the contract itself, rather than the day-to-day reality of how the work played out. But where there is no written contract, or where the contract does not genuinely reflect the arrangement, regulators will look at the totality of the relationship. The key factors they examine include:
- Control — Does the business control not just what work is done, but how, when, and where it is done? A true contractor decides their own methods. A worker who turns up when told, where told, and does exactly as directed looks like an employee.
- Integration — Is the worker integrated into the business as if they were part of the team, or are they genuinely running their own operation? Wearing the host business's uniform, using their equipment, and working exclusively for them all point toward employment.
- Ability to subcontract — Can the worker genuinely send someone else to do the job? If the answer is no, or if that has never actually happened, that is an employment indicator.
- Equipment and tools — Who provides the tools? A contractor typically brings their own. A worker using the business's equipment, PPE, and vehicles is harder to classify as genuinely independent.
- Financial risk — A true contractor can make a profit or run at a loss on a job. If the worker is paid by the hour with no real upside or downside based on the outcome, that is more consistent with employment.
- Exclusivity — Is this worker doing all or nearly all of their work for you? A genuine contractor typically works across multiple clients. Exclusive or near-exclusive arrangements tend to look like employment.
- ABN and invoicing — Having an ABN and submitting invoices does not automatically make someone a contractor. Regulators know this structure can be imposed on workers who are functionally employees.
No single factor is determinative. It is the overall picture that matters.
Why this matters particularly in construction and labour hire
The construction, civil, manufacturing and warehousing sectors have a long history of contractor arrangements — subbies, sole traders, owner-operators. A lot of that is entirely legitimate. A licensed sparky running their own business, quoting jobs, providing their own tools, and working across multiple clients is a genuine contractor.
The risk comes when businesses try to use contractor labels to avoid the costs that come with employment: super, leave entitlements, workers compensation premiums, award wages. The Fair Work Ombudsman has explicitly flagged construction and labour hire as sectors under active scrutiny for sham contracting, and the 2024 changes to the Fair Work Act tightened the framework further.
For Queensland operations in particular, there is a double compliance layer. You have Fair Work on the employment classification question, and the Queensland Labour Hire Licensing Act on the provider question. If workers are engaged through a labour hire provider that is misclassifying them as contractors to avoid licensing obligations, both the provider and the host business can be exposed.
The 2024 changes — what shifted
The Closing Loopholes legislation (effective 2024–2025) introduced changes that affect how independent contractors are assessed in some circumstances, particularly for lower-paid workers and those in industries covered by regulated labour agreements. The detail is complex and depends on the specific award and sector. If your operation relies on contractor arrangements in manufacturing, warehousing, civil or construction, it is worth getting a current legal review rather than relying on how you have done things for the past decade.
The direction of travel is clear: regulators are tightening the definition of who can genuinely be a contractor, and the cost of getting it wrong is going up.
The practical risk for host businesses
If a Fair Work investigation finds that a worker you engaged as a contractor was actually an employee, the exposure can include:
- Back-payment of all employment entitlements — super, leave loading, annual leave, personal leave — for the period of misclassification
- Civil penalties for sham contracting provisions — currently up to $93,900 per contravention for corporations (penalty unit amounts updated periodically by regulation)
- Workers compensation liability if the worker was injured and was not covered because they were classified as a contractor
- Reputational damage, particularly if the matter goes to the Federal Circuit and Family Court
"We didn't know" is not a defence. The standard applied is whether the business had reasonable grounds to believe the worker was a contractor. If those grounds do not hold up to scrutiny, the penalty still applies.
Using a licensed labour hire provider: how it actually protects you
This is where the structure of proper labour hire becomes a genuine compliance tool, not just a staffing convenience. When workers are engaged through a licenced labour hire provider, the employment relationship sits with the provider — not the host business. The provider is the employer. They handle award classification, super, leave entitlements, WHS obligations, and workers compensation.
Your obligation as a host business is to ensure the provider holds a current licence (in Queensland and any other state with a licensing regime) and that the working conditions on your site meet WHS requirements. The misclassification risk is the provider's, not yours — provided you have done due diligence on the provider you are using.
At EIR, we have been supplying workers across civil, construction, manufacturing and warehousing since 2003 — 22 years — and we operate with a full licence in every state we work in. Every worker we supply is employed by EIR, classified correctly under the relevant award, and covered for super, leave and workers compensation before they step on your site. That is how proper labour hire is supposed to work. It is also what protects you as a host business.
A practical checklist for Queensland operations
If you are reviewing your contractor arrangements or evaluating a labour hire provider, work through these:
- Are any of your "contractors" doing work that is integral to your day-to-day operation, under your direction, with your equipment?
- Are those workers unable to genuinely subcontract or work for multiple clients?
- Have those arrangements been reviewed against the post-2024 Fair Work framework?
- If you use labour hire, does the provider hold a current Queensland labour hire licence?
- Have you confirmed in writing how the provider classifies and pays its workers?
- Is the labour hire provider employing the workers (not labelling them as contractors to avoid licensing)?
If you are uncertain on any of these, get advice before Fair Work comes to you. The cost of a compliance review is a fraction of the cost of a sham contracting finding.
The bottom line
The rules on worker classification in Australia are not ambiguous in intent, even if the application to individual situations can be complex. Workers doing the work of employees should be treated as employees. Businesses that use contractor labels to avoid that obligation are exposed — and the enforcement environment is tighter now than it has been at any point in the past decade.
Labour hire, done properly through a licensed provider, removes that risk from your plate. The provider employs the workers, carries the classification risk, and handles the compliance. Your job is to check the licence is current and the provider runs a proper operation. That is a much simpler position to be in than defending a sham contracting claim.
At EIR, that is how we have operated for 22+ years — across civil, construction, manufacturing and warehousing, supplying labourers, operators, tradies, and admin support. Labour Hire That Works For You.
Need compliant labour hire for your Queensland operation?
See how EIR works across Brisbane manufacturing and warehousing on the Brisbane manufacturing labour hire page, or read our guide to QLD labour hire licensing for manufacturing managers.