Sham contracting and contractor status after Australia’s 2024 employee test
Many overseas companies start in Australia with a contractor. Since the 2024 Closing Loopholes changes, the way that arrangement runs day to day matters more than the paper it rests on.
What a reclassified Australian contractor can cost
Sham contracting and contractor status are tested in Australia by looking at how the working relationship really operates, and describing an employment relationship as independent contracting can be a breach of the Fair Work Act 2009. The Closing Loopholes reforms changed the definition of employee in 2024, and a contractor later found to be an employee can bring back pay, superannuation and state tax exposure with them.
What does sham contracting mean in Australia?
Sham contracting means presenting a relationship that is really employment as an independent contracting arrangement. The Fair Work Act 2009 contains specific sham contracting provisions, commonly cited as section 357, that expose the business doing the misrepresenting to civil penalties.
Commentary on the 2024 reforms reports that, from 27 February 2024, a business defending a sham contracting claim must show it reasonably believed the contract was one for services, with the size of the enterprise and any advice it took being relevant. The exact wording should be read on legislation.gov.au before relying on it, since the summary here draws on law-firm commentary.
Penalties under the Fair Work Act are expressed in Commonwealth penalty units, and accountancy commentary reports that the unit rose to AUD 364 on 1 July 2026. The maximum for a given contravention depends on the provision and on whether the offender is a company or an individual, so the current figure is best checked with the Fair Work Ombudsman.
For a foreign company, the relevant question is less about intent and more about exposure. A contractor engaged through a simple services agreement, paid monthly and managed like the rest of the team, can end up on the wrong side of these rules without anyone setting out to disguise anything.
How did the definition of employee change in 2024?
The Closing Loopholes package introduced a statutory definition of employment into the Fair Work Act, and the Department of Employment and Workplace Relations lists it among the measures on its Closing Loopholes page. Law-firm summaries place the new rule in section 15AA, effective from 26 August 2024.
As those summaries describe it, the test asks about the real substance, practical reality and true nature of the relationship, and it allows conduct after the contract was signed to be taken into account. That reverses the approach the High Court took in two 2022 cases, Personnel Contracting and Jamsek, where the written terms of a comprehensive contract carried most of the weight.
In practical terms, a well-drafted contractor agreement is now weaker protection than it was between 2022 and 2024. If the person works set hours, takes direction on how to do the work, uses the client’s equipment, cannot send a substitute and appears to customers as part of the business, those facts are reported to count even where the contract says the opposite. Confirm the statutory text on legislation.gov.au, since this description relies on professional commentary.
Tax and superannuation law run their own tests. The ATO applies common-law principles for PAYG withholding, and the superannuation guarantee legislation is reported to extend the meaning of employee to some contractors paid wholly or principally for their labour. A contractor can therefore be treated differently for Fair Work purposes and for super purposes, and each test needs checking separately.
Can higher-paid contractors choose the contract terms instead?
Higher-paid contractors are reported to have a route to opt out of the new employee test so that their written contract governs the relationship. The opt-out is described as available to contractors earning above a contractor high income threshold, which secondary sources say is set at the same level as the Fair Work Act high income threshold.
According to the Fair Work Ombudsman’s library, the Fair Work Act figure rose to AUD 190,100 on 1 July 2026, having been AUD 183,100 for 2025-26. Whether the contractor threshold moved to the same figure on the same date comes from a law-firm summary, so check the current contractor threshold and the opt-out procedure with the Fair Work Ombudsman before relying on it.
The opt-out, where it applies, concerns only the Fair Work Act definition. It would not change how the ATO, a state revenue office or a workers’ compensation insurer views the arrangement.
For most roles a foreign company fills in Australia, pay sits below AUD 190,100, and the opt-out question does not arise. For senior specialists above that level it may, although many of those people prefer the protections that come with employment anyway.
What happens to super, tax and payroll tax if a contractor is reclassified?
A reclassified contractor can create a bill for superannuation, withheld tax and state levies covering the period they were treated as a contractor. No single official source sets out every consequence, so the list below is a composite of the separate regimes that can apply.
- Back pay of award and National Employment Standards entitlements, such as annual leave, personal/carer’s leave and any penalty rates
- Superannuation owed under the guarantee, now at 12% of qualifying earnings
- PAYG withholding that was never deducted, with ATO penalties
- State payroll tax on wages that should have been declared
- Workers’ compensation premiums on the unreported wages
The superannuation piece has become more expensive under Payday Super. Since 1 July 2026 a late or missing contribution triggers the ATO’s new super guarantee charge. Its components are the shortfall itself, notional earnings (compounded daily and pegged to the general interest charge), a 60% maximum administrative uplift, plus a choice loading when the employee’s chosen fund was ignored. The components of the charge are tax-deductible, while general interest charge on late payment and late-payment penalties are not.
Payroll tax can apply even where a contractor stays a contractor. Revenue NSW treats certain contractor payments as taxable wages, alongside salaries, super and bonuses, and the rules in other states should be checked with each state revenue office. A company paying contractors through an Australian entity should check this separately from the Fair Work question.
The size of the bill grows with time. An arrangement that has run for two or three years before being questioned carries two or three years of super, leave and tax to reconstruct.
A simple illustration shows the scale. Take a person paid AUD 110,000 a year as a contractor for two years who is later treated as an employee. Super at 12% on that amount is AUD 13,200 a year, or AUD 26,400 over two years, before any charge components are added, and the rate that applied in earlier years should be checked with the ATO. Four weeks of annual leave a year would also need to be accounted for, along with any award entitlements.
Which features of a contractor arrangement deserve a second look?
The features that deserve a second look are the ones that make a contractor indistinguishable from an employee in daily practice. None of the points below decides the question alone, and a legal adviser should weigh them together, but each one pushes a relationship toward employment in the way the reformed test looks at it.
- The person works only for your company and has done so for a long, open-ended period
- You set their hours, approve their leave and review their performance like staff
- They cannot send someone else to do the work
- They use your laptop, email domain, systems and job title
- They are paid a fixed monthly amount without invoices tied to deliverables
- They hold no insurance, market nothing to anyone else and run no separate business
- Customers or colleagues would describe them as part of your team
Foreign companies often start this way for good reasons. Hiring a first person in Australia through a services contract feels fast when there is no local entity. The difficulty appears later, when the role grows, the person asks for leave or super, or the relationship ends and the contractor seeks advice about their status.
A review does not have to be complicated. Compare how the arrangement runs today with the contract, list the gaps, and decide whether the role should continue as a genuine contract with changed working patterns or move onto an employment footing.
Keep a written record of that review, including who took part, what facts were considered and what changed as a result. If the arrangement is questioned later, a dated record of a genuine review is far more useful than a contract clause that simply asserts contractor status.
How can you move an Australian contractor onto an employment contract?
You can move an Australian contractor onto an employment contract in one of two ways: register your own Australian company to employ them, or have an employer of record employ them for you. The first route gives you direct control but needs a proprietary company, tax registrations, a payroll that meets Single Touch Payroll rules, and state payroll tax and workers’ compensation arrangements.
Through Employer of Record Australia, the individual is employed in law by us as employer of record; we issue an employment contract with the Fair Work Information Statement, set up PAYG withholding and pay super each payday, while your team continues to direct the work. Which duties move to us, and which stay with you, is covered in our explainer on the employer of record for Australian hires.
Budget for the difference in cost. A contractor invoice usually has no super, leave or payroll tax loaded into it, while an employee on the same headline figure attracts 12% super on top, paid leave and state on-costs. Our Sydney cost breakdown for 2026-27 adds those items up for an AUD 110,000 salary. Our own charge is from USD 560 per head each month.
Where the employee works in Queensland, Victoria, South Australia or the ACT, state labour hire licensing rules may be relevant to how the EOR arrangement is structured, and the Fair Work Commission can in some cases make Same Job Same Pay orders covering supplied workers. Our article on labour hire licensing by state sets out what each scheme covers. Moving a contractor onto employment addresses the future; it does not settle any liability for the earlier contractor period, which needs its own advice.
Plan the switch-over date with the contractor. Their final invoice should end the day before employment starts, so the two periods do not overlap. Payday Super gives 20 business days for a new starter’s first contribution to arrive, which gives time to collect the fund choice, and later contributions follow the usual 7 business day deadline.
Frequently asked
Q01Is a signed contractor agreement enough to prove someone is not an employee?
Q02Can super be owed to someone engaged as a contractor?
Q03Does NSW payroll tax apply to contractor payments?
Q04What is the super guarantee charge for late contributions from July 2026?
Q05Does hiring the contractor through an EOR clear past liability?
Put your Australian contractor on a local payroll
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