PAA Article:

A Closer Look at Sham Contracting

The topic of Independent Contractors has been weighing heavily on our world for the last 4 or so years as the governing legislation and subsequent confusion related to contractors has continued to grow. As a studio owner, I have heard other owners discuss this topic a lot. All I can surmise from these discussions is that it is a very grey area, many business owners out there are often not seeking advice from the right sources (e.g. ‘my accountant told me…’), getting general advice from peers, or getting no advice at all and are very exposed to hefty fines.

The newly appointed Workplace Ombudsman, Sandra Parker, has come out swinging in relation to Sham Contracting. She has said while it’s “not to come out and grab the books and tell people what they are doing is wrong, it’s to actually help them and listen to their issues and hopefully provide assistance.” She said “It is absolutely my intention to continue the focus on small business.”

For all studio owners that means us! So I sat down with Employsure* to shoot the breeze relating to contractors.

How do we determine who can or should be a contractor? (this comes from the


The factors that are indicative of an employee are that they:

  • have their work directed and controlled by their employer
  • work set or standard hours (casual employees hours can vary from week to week)
  • usually have an ongoing expectation of work
  • bear no financial risk – it’s covered by their employer’s insurance
  • are provided by their employer with tools or a tool allowance is provided
  • have income tax deducted by their employer
  • are paid wages or a salary regularly
  • are entitled to paid leave.

Independent contractors

The factors that are indicative of independent contractors are that they:

  • have a high level of control over how the work is done, including the choice to hire others to assist
  • agree to the hours required to complete the job
  • usually engaged for a specific task or time
  • bear the risk of making a profit or a loss and usually bears responsibility and liability for poor work or injury and usually have their own insurance
  • use their own tools and equipment
  • pay their own tax and GST
  • have an ABN and submits invoices
  • don’t receive paid leave.

But our tools are huge, for example there is no way any instructor would be carting reformers around to teach, do the rules allow for that?

As the legislation currently stands, no. There is a blanket approach to determinations in relation to what is an Independent Contractor and Sham Contracting. It is however something that would obviously have to be considered if a breach was found by Fairwork and there is starting to be an industry specific approach taken when audits are undertaken. But at this stage, the legislation is this blanket approach.

In the above list it says that Independent Contractors pay their superannuation and insurances, is this true?

In some instances for insurances, yes, Independent Contractors do pay their own insurances. However, Engagers of contractors can most definitely be found to be liable for both the Super and insurance (worker’s comp) cover. This is especially true if the contractor is a sole trader ABN holder. There have been a lot of test cases on this, especially in building and construction but they apply across the board. So it is likely that many of your employers are liable for Super (including back payment to when the ‘contracting’ started and workers compensation.

How are audits on workplaces generally started?

They can be proactive (the business putting themselves forward) or reactive (a disgruntled former worker, or random picking from Fairwork, the ATO or WorkCover).

All three agencies can investigate one business?

Yes, and that is where it becomes tricky, each agency can investigate and each agency have different criteria for assessing Sham Contracting.

It is usually Fairwork who will investigate first and if a business is found in breach, it is an automatic red flag for the other agencies. So you may have one instructor that is being employed as an Independent Contractor that should be an employee, and that breach sees WorkCover coming in for a full audit on WHS (are all your forms and policies up to date…)

Each agency can issue significant fines and also have the authority to review the past 7 years of employment history.

Many instructors in our industry want to be Independent Contractors, does this matter in the case of an audit?

No. The preference of the worker does not come into consideration in determining if someone is a Sham Contractor. Each worker’s situation is what matters, so one business may have some instructors that are employees and some that can be Independent Contractors. It can get complicated and it can change. For example, there is the 80% rule – which is that if they earn 80% or more of their income with your business they are employees.

BUT, let’s say that an instructor is working for your business and they only work a shift while having other shifts at other studios, they could be an Independent Contractor. However, over time, they start to drop shifts at the other studios and are either mainly or only working at your studio – their situation within your studio has now changed and they now are by law an employee.

Riiiiiiight, clear as mud? If you are a studio owner that employs instructors as Independent Contractors and haven’t sought advice that covers you for each agency, now may be the time.

If there is enough member interest, Employsure has offered to host a series of webinars on this topic. Please email to register your interest, and if you have questions already, include them so that they can be answered for everyone in the webinar!


Felicia Darbyshire-Pirie
PAA Ordinary Officer
Director of The Pilates Centre, Canberra


*Employsure is Australia’s leading expert in the field of workplace relations providing specialised advice in the running of your business. If you want immediate specific advice please visit or 1300 651 415.