If you’re running a small business in Australia, chances are you have hired a subcontractor at some point along the way. Unfortunately, calling someone a ‘Contractor’ or ‘Subby’ doesn’t mean the ATO or Fair Work will agree with you. Getting it wrong can lead to significant penalties, unpaid superannuation liabilities, and backpay of employee leave entitlements..
There are two separate issues to consider:
- Sham Contracting test – Identify if the Contractor is an Employee for Fair Work; and
- Superannuation Test – If the Contractor really is a contractor, are you required to pay Superannuation?
Outlined below are the criteria for both the Sham Contracting and Superannuation Tests.
Sham Contracting and Superannuation Tests
Outlined below are the criteria for both the Sham Contracting and Superannuation Tests
| Criterion | Sham Contracting Test | Super Guarantee Test | Similarities | Differences |
| Control | Focuses heavily on whether the employer controls how, when, and where work is done. | Considers control but is less heavily weighted. | Both look at control. | Sham contracting focuses more heavily on control. |
| Integration | Assess if the worker is integrated into the business. | Less relevant; focuses on whether work is principally for labour. | Both touch on integration. | Integration is central to sham contracting but minor for super. |
| Delegation of Work | Looks at whether the worker can subcontract or delegate. | Looks at whether the worker must personally perform the work. | Both value delegation as a sign of independence. | Super places more emphasis on personal performance. |
| Provision of Tools | Considers whether the worker supplies their own tools and equipment. | A minor supporting factor. | Both consider the tools used. | Sham contracting gives this greater weight. |
| Payment Structure | Examine if the worker is paid regularly, like wages. | Looks at whether payment is primarily for labour provided. | Both use payment as a factor. | Sham contracting focuses on regularity, with a focus on labour provision. |
| Economic Risk | Focuses on whether the worker bears their own risk of profit or loss. | Supporting evidence only. | Both consider risk. | Economic risk is a key factor for sham contracting. |
| Reality vs Agreement | Looks beyond the written contract to how the relationship works in practice. | Also, it looks beyond the contract but focuses mainly on the provision of labour. | Both check the actual working conditions. | Sham contracting takes a broader approach to reality. |
Consequences of Getting it Wrong
So what’s the big deal if you misclassify a worker? It can be extremely costly. Here’s why.
Backpay – Superannuation
If the ATO determines your contract was actually an employee for the purposes of superannuation, you will likely have to
- Pay missed super contributions — currently 11% of the labour component (exclusive of GST
- Cover the Superannuation Guarantee Charge (SGC) – This is 10% interest and admin penalties on top of the missed superannuation contributions.
- Wear the cost yourself – You are unable to claw it back from the worker, and you will need to pay it yourself.
- No Tax Deduction — Late superannuation payments and penalties are not tax deductible
Missed superannuation is a significant focus point for the Australian Government, and they are throwing significant resources at identifying and pursuing it. TaxDigital has seen a significant rise in Small Businesses being audited for superannuation late payments.
Backpay – Employee Entitlements
If FairWork deems that the contractor is an employee, they will likely be entitled to backpay for:
- Annual Leave
- Personal/carers Leave
- Public Holiday Pay
- Long Service Leave
These employee entitlements can add up to a significant amount and can cripple small businesses, especially in cases where the amounts go back several years.
Fines and Penalties
As if the backpay wasn’t enough, both the Fair Work and the ATO can issue significant penalties if they find you engaging in sham contracting.
- Civil penalties of up to $18,780 per contravention for individuals, and up to $93,900 for companies (as at 2025).
- Additional penalty interest on unpaid super contributions.
- Director penalty notices could apply if you fail to meet your super obligations as a company director.
How Can Tax Digital Help?
Small Businesses must be on the front foot when engaging contractors, the financial risks are just too damn high. It’s not about what’s in the contract and what you call the worker – it’s how the relationship operates. The government has the benefit of hindsight and can look at what actually happened. Remember, if a worker looks, acts and is treated like an employee, chances are that’s how they should be treated.
At TaxDigital, we help small businesses assess their worker relationships correctly and stay compliant with the tax and employment laws. Book a discovery call today on 0407 438 849 or email [email protected] — let’s make sure your worker relationships are treated right for 2025 and beyond.