Sham Contracting Checklist for Australian Businesses Before EOFY

Before EOFY, every Australian business that uses contractors should review how each contractor actually works in practice – not just what the agreement says. The biggest red flags are control, fixed hours, exclusive work, no right to delegate, using your tools, being paid like wages, and being paid mainly for labour without proper super consideration.

EOFY is when a lot of business owners finally look closely at their contractor arrangements. Invoices are being reconciled. TPAR records are being prepared. Accountants are asking questions. Payroll, super and tax records are being reviewed. It is also the time when a small “we have always done it this way” issue can turn into a bigger compliance problem.

If your business engages contractors, freelancers, consultants, subcontractors, delivery drivers, tradies, support staff, virtual assistants, designers, marketers, technicians or any other non-employee workers, this checklist will help you spot the common warning signs before the end of financial year.

This article is general information only and is not legal advice. The safest next step is to get your specific arrangements reviewed before you make changes.

EOFY contractor risk check:If a contractor works like part of your team, under your direction, mainly for your business, using your systems and with little commercial independence, the label “contractor” may not be enough.

What is sham contracting in Australia?

Sham contracting can happen when a business represents a worker as an independent contractor when, in substance, the worker is really an employee and the business does not reasonably believe the worker is genuinely a contractor.

The problem is not simply using contractors. Many businesses lawfully use independent contractors every day. The risk starts when the written label does not match the reality of the working relationship.

For example, a contractor arrangement may need closer review if the worker:

• works set hours chosen by your business;
• performs ongoing work inside your business rather than delivering an independent result;
• cannot delegate or subcontract the work;
• uses your tools, equipment, software or systems;
• is paid regularly for their time rather than a quoted outcome;
• works almost exclusively for your business; or
• does not carry real financial risk for the work.

None of these factors is automatically decisive on its own. The correct classification depends on the whole arrangement. But if several of these are true, the business should not ignore it.

Why EOFY is the right time to review contractor compliance

EOFY is a practical trigger point because your contractor records, tax reporting, payroll data and super obligations are already being reviewed. It is also when businesses often prepare or check Taxable Payments Annual Report (TPAR) information, reconcile contractor invoices and speak with accountants about the year ahead.

The ATO and Fair Work Ombudsman have publicly increased focus on sham contracting. Their joint messaging makes it clear that regulators are looking at arrangements where businesses treat workers like employees but call them contractors. The risk is not limited to construction. Cleaning, courier, road freight, security, IT, professional services and other industries can also be exposed depending on the facts.

This is why a checklist matters. It gives business owners a fast way to identify the workers who need a deeper review before the financial year closes.

The quick red-flag test

Start with this simple question for each contractor:

If Fair Work or the ATO looked at how this person actually works, would they see an independent business – or would they see someone operating like part of our team?

If the honest answer is “part of our team”, keep reading. That does not always mean the arrangement is wrong, but it does mean it should be reviewed.

Sham contracting checklist before EOFY

Use the checklist below to review each contractor arrangement. The goal is not to panic. The goal is to identify which arrangements are low risk, which need updating, and which may need legal advice before the new financial year starts.

1. Check the reality, not just the contract label

A contract that says “independent contractor” is helpful, but it is not the whole story. Regulators and courts can look at how the arrangement actually operates. If the written agreement says the contractor is independent, but your business controls their hours, work method, tools and availability, the written label may not protect you.

2. Review who controls the work

Ask whether the contractor decides how, when and where the work is performed, or whether your business directs those details. Employees are more likely to work under the direction and control of the business. Contractors are more likely to control the manner of delivering an agreed result.

3. Look at whether they can delegate or subcontract

A genuine contractor often has the ability to delegate or subcontract the work, subject to reasonable quality and approval requirements. If the person must personally perform all work and cannot send someone else, that can point closer to employment.

4. Check tools, equipment and systems

Who provides the main tools and systems? If your business provides the laptop, uniform, vehicle, email address, software access, equipment and internal processes, it may look more like an employment-style arrangement. Some access is normal, especially for security or project reasons, but the overall picture matters.

5. Review payment structure

Contractors are usually paid for a result, project, milestone or agreed scope. Employees are commonly paid wages or salary for time worked. If a contractor is paid every week or fortnight based on hours, with no real project outcome or commercial pricing, the arrangement should be checked.

6. Confirm whether the contractor carries commercial risk

Independent contractors usually carry some business risk. They may need to fix defective work at their own cost, hold insurance, quote for work, manage profit and loss, and bear responsibility for how they deliver. If your business carries nearly all the risk and the worker is simply paid for time, that can be a red flag.

7. Check exclusivity and dependence

A contractor who works almost exclusively for one business over a long period may need closer review, especially if they are integrated into the team. Genuine contractors often have the ability to work for multiple clients and build their own business goodwill.

8. Review superannuation exposure

A worker can be a contractor for some purposes but still be treated as an employee for superannuation guarantee purposes if they are paid mainly for their labour. This is one of the most commonly missed issues. Do not assume “ABN plus invoice” automatically removes super obligations.

9. Check PAYG, payroll and tax reporting records

If a worker should have been treated as an employee, PAYG withholding, payroll tax, leave, award coverage and other obligations may need review. Businesses in TPAR industries should also ensure contractor payment reporting is accurate and consistent.

10. Review the written contractor agreement

The agreement should match the actual arrangement. It should cover scope of work, payment terms, GST, insurance, IP ownership, confidentiality, subcontracting, tools, liability, termination, dispute process and compliance obligations. A generic template rarely captures the commercial detail needed for a specific business.

11. Keep evidence of genuine independence

If the arrangement is genuinely independent, keep evidence. This may include quotes, statements of work, invoices, proof of insurance, ABN details, business website, multiple-client evidence, project briefs, milestone records and correspondence showing the contractor controlled how the work was performed.

12. Fix risky arrangements properly

Do not fix a risky arrangement by simply changing the heading on the contract. If the arrangement needs to change, update both the legal document and the working reality. In some cases, the right move may be to employ the person, restructure the engagement, update payment terms, adjust delegation rights or get advice before making changes.

What evidence should you keep for a contractor review?

A good EOFY contractor review is only as strong as the evidence behind it. If you ever need to explain why a worker was treated as a contractor, your records should show more than invoices.

Useful documents may include:

• signed contractor agreements and any variations;
• statements of work, project briefs and scopes;
• quotes, proposals and acceptance emails;
• invoices showing project or milestone-based billing where applicable;
• evidence of the contractor’s ABN and business registration details;
• insurance certificates where relevant;
• emails showing the contractor controlled how work was delivered;
• records of delegation or subcontracting rights, if used;
• proof the contractor worked for other clients, if available and appropriate;
• TPAR records and tax reporting documents; and
• superannuation assessment notes, especially where labour is the main component.

The aim is not to create a paper trail after the fact. The aim is to make sure your documents match the commercial reality from the start.

What should be inside a contractor agreement?

A strong contractor agreement should not be a generic one-page template. It should clearly explain the commercial arrangement and reduce confusion before a dispute or compliance review arises.

At minimum, review whether your contractor agreement covers:

• the exact services or deliverables;
• whether payment is by project, milestone, hourly rate or retainer;
• who supplies tools, equipment and software;
• whether the contractor can delegate or subcontract;
• insurance requirements;
• intellectual property ownership;
• confidentiality and data protection;
• work health and safety responsibilities;
• tax, GST and invoice requirements;
• termination rights;
• dispute resolution process;
• non-solicitation or restraint wording where appropriate; and
• a clear statement that the agreement must match the real working arrangement.

If the contract says one thing and the day-to-day arrangement says another, the day-to-day arrangement may become the bigger problem.

Common sham contracting myths business owners should stop relying on

Myth 1: “They have an ABN, so they must be a contractor.”

An ABN helps identify a business, but it does not decide the legal relationship on its own.

Myth 2: “They invoice us, so we are safe.”

Invoices are relevant records, but invoicing alone does not prove a genuine contractor relationship.

Myth 3: “They asked to be a contractor.”

A worker’s preference is not enough if the reality of the arrangement is employment-like.

Myth 4: “They only work part time, so they cannot be an employee.”

Employees can be full time, part time, casual or fixed term. Hours alone do not decide the issue.

Myth 5: “We used a contractor template, so the paperwork is covered.”

A template is only useful if it is tailored and matches the real arrangement.

What to do if your checklist shows a risk

If you find one or two red flags, do not ignore them. If you find several, get the arrangement reviewed before making promises to the worker or changing payment structure.

A practical action plan looks like this:

1. List every contractor currently engaged by the business.
2. Group them by risk: low, medium and high.
3. Check whether the written agreement matches the actual working arrangement.
4. Review super, PAYG, workers compensation and payroll exposure with your lawyer and accountant.
5. Update contracts where the arrangement is genuinely independent but poorly documented.
6. Restructure or reclassify arrangements where the reality is closer to employment.
7. Create a contractor onboarding process so the same issue does not repeat next financial year.

The biggest mistake is doing nothing because the issue feels uncomfortable. Contractor compliance problems usually become more expensive the longer they sit.

EOFY contractor compliance checklist

Use this short version as a final pre-EOFY scan:

• [ ] Have we listed every contractor paid this financial year?
• [ ] Do we know which contractors are in TPAR-reportable categories?
• [ ] Does each contractor have a signed, current agreement?
• [ ] Does each agreement match the actual working arrangement?
• [ ] Can each contractor control how they deliver the work?
• [ ] Can they delegate or subcontract where appropriate?
• [ ] Do they provide their own tools, insurance and business systems where relevant?
• [ ] Are they paid for a commercial outcome, not just treated like wages?
• [ ] Have we considered super obligations where the contract is mainly for labour?
• [ ] Have we reviewed any contractor who works mostly or only for us?
• [ ] Have we kept evidence supporting genuine independence?
• [ ] Have we asked for legal advice on any medium or high-risk arrangement?

When should you get legal advice?

Get legal advice before EOFY if any of these apply:

• you have long-term contractors working regular hours;
• you provide the contractor’s tools, systems or equipment;
• the contractor works only or mainly for your business;
• the contractor performs the same work as employees;
• you are unsure whether super should be paid;
• a worker has raised concerns about being classified as a contractor;
• you are about to terminate or reduce work for a contractor;
• you operate in a TPAR industry; or
• your contractor agreement has not been reviewed in the last 12 months.

Legal advice is not just about avoiding penalties. It is about building a cleaner, more scalable business. When your contractor arrangements are clear, your team, accountant, bookkeeper and managers know exactly how to engage people properly.

How Law by Design can help

At Law by Design, we help Australian businesses review and clean up contractor arrangements before they become disputes, audits or expensive compliance problems.

Depending on what your business needs, we can help with:

• fixed-price contractor agreement reviews;
• contractor versus employee risk reviews;
• sham contracting risk assessments;
• contractor agreement drafting and updates;
• employment contract and onboarding clean-up;
• EOFY legal health checks; and
• plain-English advice you can actually act on.

Want to check your arrangements before EOFY? Download the Contractor Compliance Checklist or book a fixed-price contractor review. A short review now can save a much bigger problem later.

FAQ: Sham contracting checklist Australia