Blog Post:

Understanding Independent Contractors, Sham Contracting and Superannuation Obligations in WA

In Western Australia, many small businesses rely on independent contractors to manage costs, boost flexibility, and meet demand during peak periods. However, the line between a true contractor and an employee isn’t always clear-cut—and getting it wrong can land your business in hot water.

Incorrectly classifying workers can result in sham contracting—a serious breach of employment law—and put your business at risk of non-compliance with the Fair Work Act, ATO obligations, and superannuation laws.

Sham Contracting is a Compliance Red Flag

From a compliance standpoint, sham contracting is a red flag that regulators like the Fair Work Ombudsman and ATO take seriously. It is not enough to assume a worker is an independent contractor simply because they have an ABN or invoice for services.

In fact, even well-meaning employers who don’t realise they’ve crossed the line can still face harsh penalties.

That’s why Strategic HR Australia strongly encourages all employers to complete a Contractor vs Employee Assessment Checklist and seek expert advice before engaging independent contractors or issuing contracts. A small misstep today could turn into a costly compliance breach tomorrow.

Coming Soon: We’re launching a free HR Compliance Audit to help you uncover hidden risks in your business. Check back soon to take the test and get your personalised report — it’s the easiest way to stay compliant and protect your business.

Try our Free HR Compliance Audit: Uncover hidden risks, check your legal obligations, and get a personalised compliance report in minutes.

What Is Sham Contracting?

Sham contracting occurs when a business misrepresents an employment relationship as an independent contracting arrangement, whether deliberately or unintentionally. This is often done to avoid legal obligations like:

Superannuation
Leave entitlements
Workers’ compensation
Payroll tax

Under the Fair Work Act 2009, it is unlawful for employers to:

Misrepresent an employment relationship as a contracting arrangement
Dismiss (or threaten to dismiss) an employee to re-engage them as a contractor
Make false statements to persuade someone to work as a contractor

If a worker is performing their duties in a way that resembles an employee more than a contractor—even if a contract or ABN is in place—the business may be liable for back pay, unpaid entitlements, and penalties.

Signs It May Not Be a Genuine Independent Contracting Arrangement

A worker is more likely to be considered an employee if:

They are paid by the hour, not per job or outcome
The business sets their hours, tasks, or procedures
The worker uses the business’s tools or equipment
They cannot delegate their work to someone else
They are integrated into the business’s team
They rely on the business for ongoing income

Misclassification can expose your business to claims of unfair dismissal, unpaid superannuation, and significant penalties under the Fair Work Act.

Not sure if your worker is truly an independent contractor?
Download our free Contractor vs Employee Checklist — a practical tool designed to help you make informed, compliant decisions with confidence.

Superannuation and Independent Contractors: What You Need to Know

Even if a worker holds an ABN, you may still be required to pay Super Guarantee (SG) contributions if:

More than 50% of the payment is for labour
The worker is paid for personal services, not a business outcome
The work can’t be delegated to another person

According to the ATO, these arrangements are considered employment for superannuation purposes, and super must be paid at the current SG rate of 12%.

Failing to do so can result in:

SG Charge liabilities
Penalties and interest charges
Legal action from the ATO or Fair Work Ombudsman
Reputational damage

How Strategic HR Australia Can Help You Stay Compliant

Sham contracting and incorrect worker classification are compliance issues that should never be left to chance.

At Strategic HR Australia, we specialise in helping businesses navigate the complexities of engaging subcontractors lawfully and effectively, and work with small businesses across Western Australia to:

Review current contractor arrangements
Complete a practical Contractor vs Employee Checklist
Draft the correct contract documents
Ensure compliance with ATO, Fair Work, and state-based obligations
Train managers on how to lawfully engage independent contractors

We tailor our advice to your specific industry and business needs—ensuring compliance without confusion.

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