Sham Contracting in Residential Construction

What it is

Sham contracting is the practice of presenting a worker as an independent contractor when the relationship is really one of employment. The arrangement is usually designed to dodge superannuation, leave entitlements, award wages, workers compensation premiums and payroll tax. Residential construction has been a high-risk sector for sham contracting for years because so much trade work is delivered through subcontracted labour.

The conduct is prohibited by Part 3-1 Division 6 of the Fair Work Act 2009 (Cth), specifically sections 357, 358 and 359. Each section attacks a different version of the same trick.

The three prohibitions

Section 357 prohibits an employer from representing to a person that an employment contract is in fact a contract for services under which the person performs work as an independent contractor. The representation can be in writing, oral, or by conduct.

Section 358 prohibits dismissing an employee, or threatening to dismiss them, in order to re-engage them to perform the same or substantially the same work as an independent contractor.

Section 359 prohibits an employer from making a statement they know to be false in order to persuade or influence a current or former employee to enter into a contract for services to perform the same or substantially the same work.

The 2024 change to the section 357 defence

Before 27 August 2024 an employer could escape a section 357 contravention by showing they did not know and were not reckless as to whether the contract was a contract of employment. The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 replaced the recklessness test with a reasonableness test. From that date the employer must prove they reasonably believed the contract was for services, having regard to the size and nature of their business.

The shift matters for builders because "I assumed because they had an ABN" is no longer a credible defence on its own. A reasonable belief now requires actual enquiry into the substance of the relationship including the worker''s right to delegate, who controls the work, who supplies the tools and whether the worker is running a real business.

Penalties and remedies

Each contravention carries civil pecuniary penalties under section 539. From 27 August 2024 the maximum penalty per contravention is 600 penalty units for a body corporate (60 penalty units multiplied by the corporate multiplier of 5, then the increased rate for sham contracting). For a serious contravention the maximum is much higher, with the Fair Work Ombudsman able to seek up to three times the underpayment amount in some matters.

Courts can also order:

• back-payment of unpaid wages, annual leave, personal leave and redundancy
• back-payment of superannuation
• payment of compensation for any loss
• injunctions against further conduct
• accessorial liability orders against directors and HR personnel who were knowingly involved

Examples of FWO enforcement

The Fair Work Ombudsman has pursued sham contracting cases against businesses across many industries. In July 2024 the FWO secured nearly $200,000 in penalties against a Sydney research company that had engaged workers with disability as contractors when they were employees. In the construction sector the regulator routinely runs proactive operations targeting subcontracting arrangements that look like disguised employment.

What residential builders need to do

Builders who use single-trade subcontractors should run a simple internal check before engaging anyone. The right questions are not "do they have an ABN" but rather:

• can the worker genuinely subcontract or send a replacement, and have they ever done so
• does the worker carry their own public liability, workers compensation policy and insurance
• does the worker work for other principals during the same period
• does the worker quote on a job basis or invoice for hours
• does the worker supply their own substantive tools and materials
• does the worker bear any commercial risk of loss

The more of those that point to employment, the higher the sham contracting risk. Builders should keep written subcontractor agreements that reflect the real arrangement and certificates of insurance from each sub on file. Where status is unclear the safer course is to engage the worker as an employee or insist the sub trades through a company with its own workforce.