Sham Contracting in Australia: Section 357 and the New Reasonableness Defence

Section 357 of the Fair Work Act 2009 (Cth) bans misrepresenting an employment relationship as independent contracting. Since the Closing Loopholes reforms, an employer's defence turns on whether it reasonably believed the arrangement was genuine contracting, a higher bar than the old recklessness test.

What Sham Contracting Is

Section 357(1) of the Fair Work Act 2009 (Cth) provides that an employer must not represent to an individual it employs, or proposes to employ, that the contract under which the individual is or would be employed is actually a contract for services, under which the individual performs work as an independent contractor. In plain terms, this is the law's response to a worker being told, or made to believe, that they are running their own contracting business when in substance they are an employee. The consequence of sham contracting for the worker is significant, because contractor status removes access to the National Employment Standards, minimum wage and award coverage, paid leave, superannuation guarantee contributions on their behalf, and unfair dismissal and general protections rights that depend on being an employee.

Employee or Contractor: The Real Substance Test Under Section 15AA

Whether a worker is genuinely an employee or a contractor is not decided by what the contract calls them. Section 15AA of the Fair Work Act, enacted in response to the High Court's decisions in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, directs that the question is determined by ascertaining the real substance, practical reality and true nature of the relationship. That requires considering the totality of the relationship, including the terms of the contract, but also other factors relating to how the relationship actually operates, including how the contract is performed in practice. Factors commonly weighed in that assessment include the degree of control the business exercises over how, when and where the work is done, whether the worker can subcontract or delegate the work to someone else, who bears the commercial risk and provides the equipment, whether the worker operates their own distinct business serving other clients, and how the parties are paid. No single factor is decisive; the assessment looks at the relationship as a whole, as it actually operates.

The Old Defence vs the New Reasonableness Defence

Section 357(2) previously gave an employer a defence to a sham contracting allegation if it proved that, when the representation was made, it did not know and was not reckless as to whether the arrangement was really employment. That was a relatively low bar: an employer only had to avoid closing its eyes to an obvious answer, not actually turn its mind to getting the classification right. The Closing Loopholes reforms replaced that defence. Section 357(2) now provides that the employer must instead prove it reasonably believed, at the time the representation was made, that the contract was a contract for services. This is a materially higher standard: it requires the employer to show it actually formed a considered, reasonable view that the arrangement was genuine contracting, not merely that it avoided recklessness.

Factors That Go to Whether an Employer's Belief Was Reasonable

Section 357(3) directs that, in deciding whether the employer's belief under subsection (2) was reasonable, regard must be had to the size and nature of the employer's enterprise, and regard may be had to any other relevant matters. This means the same set of facts can be judged differently depending on the employer: a large, well-resourced business with in-house or external legal and HR advice is expected to reach a more considered, defensible view than a very small operator engaging its first worker. Other relevant matters a court can weigh include whether the employer sought advice before treating the worker as a contractor, whether it followed established industry practice, and how closely the actual working arrangement matched the terms it says it relied on.

Related Conduct the Act Also Bans

The Fair Work Act does not stop at the initial representation. Section 358 separately makes it unlawful for an employer to dismiss, or threaten to dismiss, an employee in order to re-engage them to do the same, or substantially the same, work as an independent contractor. Section 359 makes it unlawful for an employer to make a statement it knows is 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 as an independent contractor. Together with section 357, these three provisions cover the initial misrepresentation, using dismissal as leverage to force a switch to contracting, and knowingly false statements used to talk a worker into it.

Penalties

Contraventions of sections 357, 358 and 359 are each civil remedy provisions under Part 4-1 of the Fair Work Act, meaning a court can order civil penalties against an employer found to have breached them, on top of any other remedy available to the worker, such as recovery of unpaid entitlements once the true employment relationship is established.

Why It Matters to the Worker

Being wrongly classified as a contractor is not just a labelling problem. A worker treated as a contractor does not receive superannuation guarantee contributions on their behalf, is not covered by a modern award's minimum rates and conditions, does not accrue paid annual or personal leave, is not protected by unfair dismissal law regardless of how long they have worked there, and cannot bring a general protections claim that depends on employee status, though some general protections rights extend to certain independent contractors separately. Recharacterising the relationship as employment, once its real substance is established under section 15AA, can restore access to these entitlements going forward and can support a claim for entitlements that were not paid because of the misclassification.

What to Do If You Think You've Been Sham Contracted

A worker who suspects they have been engaged as a contractor when the real substance of the relationship is employment can raise the issue with the Fair Work Ombudsman, which investigates sham contracting complaints and can take enforcement action. Because the outcome depends on applying the section 15AA factors to the specific facts of the working relationship, and because the section 357(2) defence now turns on what the employer reasonably believed, whether a particular arrangement is genuine contracting or sham contracting is not something that can be answered from a job title or contract heading alone.

This article provides general information about sham contracting under Australian Commonwealth workplace law as at 19 July 2026. It is not legal advice, does not take into account your individual circumstances or the terms of any applicable modern award, enterprise agreement or employment contract, and does not account for later legislative or Fair Work Commission developments. For advice about a specific situation, consult a legal practitioner admitted in the relevant Australian state or territory, the Fair Work Ombudsman, or the Fair Work Commission.

Related reading: the Australia employment law hub, Wage Theft and Underpayment in Australia, General Protections and Adverse Action, and Minimum Wage and Pay Rates in Australia.

Frequently Asked Questions

What is sham contracting?

Sham contracting is when an employer represents to a worker that their employment relationship is actually an independent contracting arrangement, when in substance the worker is an employee. It is unlawful under section 357 of the Fair Work Act 2009 (Cth).

How do you tell if someone is an employee or an independent contractor?

Section 15AA of the Fair Work Act says the question is decided by the real substance, practical reality and true nature of the whole relationship, including how the contract is actually performed, not just what the contract or a job title says.

Has the sham contracting defence for employers changed?

Yes. Under the old law, an employer had a defence if it merely was not reckless about the true nature of the relationship. Since the Closing Loopholes reforms, section 357(2) requires the employer to prove it reasonably believed the arrangement was genuine contracting, a higher bar.

Does the size of a business affect the sham contracting defence?

Yes. Section 357(3) says that in judging whether an employer's belief was reasonable, regard must be had to the size and nature of the employer's enterprise, so a large, well-resourced employer and a very small operator are not held to an identical standard.

Can my employer dismiss me to make me become a contractor for the same job?

No. Section 358 of the Fair Work Act separately makes it unlawful for an employer to dismiss, or threaten to dismiss, an employee in order to re-engage them to do the same or substantially the same work as an independent contractor.

What entitlements do I lose if I'm wrongly treated as a contractor?

A misclassified worker misses out on superannuation guarantee contributions, award minimum rates and conditions, paid annual and personal leave, and unfair dismissal and general protections rights that depend on being an employee.

What are the penalties for sham contracting?

Breaches of sections 357, 358 and 359 are civil remedy provisions, meaning a court can impose civil penalties on an employer found to have contravened them, in addition to other remedies available to the affected worker.

What should I do if I think I've been sham contracted?

You can raise the issue with the Fair Work Ombudsman, which investigates sham contracting complaints. Because the outcome depends on the real substance of your specific working relationship, it is worth setting out how the work is actually controlled, performed and paid, not just what the contract is titled.