Is Your Contractor Actually an Employee? What You Need to Know to Avoid a Sham Contracting Claim

The term ‘sham contracting’ gets thrown around a lot nowadays but do you really know what it means? Could you be eligible for a claim against your employer for sham contracting or could your employee lodge a claim against you? We break down what you need to know to avoid an unexpected claim.

What is sham contracting?

Sham contracting occurs when an employer treats an employee as an independent contractor. The major problem with this is the variance in the rate of pay, employee entitlements and insurance. While it may not be intentional, a court can rule a sham contracting arrangement has been in place when comparing elements of the employment relationship.

Things to consider when determining whether a person is an employee or contractor:

Control over work:

Employees generally work under the guidance of an employer, with allocated tasks and means of completion laid out by the employer for the employee to follow.

Contractors are considered experts in their set task and should be given the freedom to complete a set task in any manner they deem fit. Contractors maintain a high degree of power over how the work is to be completed, unlike an employee.


Employees operate as a worker for the employer and will likely be required to sign an employment contract prior to commencing work for the employer.

Contractors work for their own business through an ABN and contract their services out to other businesses. The contractor’s business is separate from the employer’s business.

Labour expectations:

Employees will generally receive set hours and days. While this may not be regular for a casual worker, the worker will still none the less be considered an employee of that business with reoccurring shifts.

Contractors are often hired to complete a set job or task. This does not usually involve set hours or days but involves working on a set task until it is complete.

Commercial risk:

Employees bear no commercial risk and should be insured by the employer when working.
Contractors often take out their own insurance and often do not receive payment until a job is complete. They will also be responsible for any physical harm to themselves whilst completing a task.


Employees are often given the required equipment to complete a job. This will often include a work uniform and any tools that would be needed to satisfy their job description.

A contractor will typically bring their own tools to complete a task. This is because they often have the authority and freedom as to how the task is to be completed and hence what tools will be required.

Payment method:

Employees are often paid in regular instalments on set days. While this may change from time to time, employees are not expected to submit invoices and should be paid accordingly for hours worked.

Contractors either submit invoices (as a business through their ABN) or receive payment at the end of a set task. They do not receive a set regular pay from an employee without the filing of an invoice.

Leave entitlements:

If an employee is full-time or part-time, they should be entitled to paid leave and entitlements.

Contractors do not benefit from paid leave as they are not considered an employee of the business.

What if you satisfy some elements of both a contractor and employee?

There is often not one correct answer as to who is an employee or who is a contractor. Courts will take into consideration each case on its own merits and weigh up criteria for both sides. The above is also not an exhaustive list of what the court will take into consideration. It is up to the courts discretion as to what they consider relevant in coming to a decision.

Employers can be subject to significant consequences if they are found to be either paying an employee as a contractor to remove their working entitlements or firing an employee to re-hire them as a contractor completing the same work.

If you think you may, in fact, be an employee but are being paid as a contractor or your contractors could argue a case against you for sham contracting, you should seek legal advice.

Want to know more about employment law? Looking for an experienced solicitor in Newcastle, Sydney or the Hunter to assist you with your employment law matter? Call us on (02) 4929 7002, email us or complete an enquiry form.