Government changes defence against sham contracting whilst increasing penalties

Government changes defence against sham contracting whilst increasing penalties

Government changes defence against sham contracting whilst increasing penalties

Employers who engage contractors should note the provisions of the Federal Labour government’s Fair Work Legislation Amendment (Closing Loopholes) Bill No.2 (the Bill), which has amended ‘sham contracting’ provisions in the Fair Work Act 2009 (the Act).

Sham contracting refers to the unlawful practice of representing an employee as an independent contractor, giving employers the capacity to avoid paying certain entitlements such as overtime, leave and minimum rates of pay.

Under section 357 of the Act, a business can be prosecuted for misrepresenting an employment relationship, described as

“A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor”.

The Bill has widened the threshold for what constitutes a serious contravention by changing the description of actions done knowingly and systematically to ones done either knowingly or recklessly.

To successfully defend a sham contracting allegation, employers now must show that they reasonably believed the contract was a contract for services. This is a more objective test than the previous defence under the Act, which was that the employer did not know and was not reckless as to whether the contract was for an individual’s employment rather than services.

If an individual believes that their employer has misrepresented the true nature of the employment relationship, they are able to bring a general protection claim under the Act, which the Fair Work Commission then hears.

The Bill has also made significant increases to penalties for a range of contraventions of the National Employment Standards (NES), modern awards, and enterprise agreements.

The maximum penalty that courts can now impose is up to $469,500 for a body corporate, or up to $4.695M for a body corporate for ‘serious contraventions’.

The changes will come into effect from the granting of Royal Assent.

Fair Work Legislation Amendment (Closing Loopholes No. 2) Bill 2023 – Parliament of Australia

Civil penalties and sham contracting

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For queries about independent contractors, sham contracting, or other employment questions, please contact Dean Cameron at Workforce Advisory Lawyers – We Know Employment Law on 0417 622 178, 1300 WAL LAW or via email to

Disclaimer: This information is provided as general advice on workplace relations and employment law. It does not constitute legal advice, and it is always advisable to seek further information regarding specific workplace issues. Liability limited by a scheme approved under professional standards legislation.

Ref: 443.0624

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