Sham Contracting in Australia: Lessons from Holmes v Torbay Constructions Pty Ltd [2026] FWC 552

When an "Independent Contractor" Is Really an Employee

MYUNION's Principal Advicate Brian AJ Newman, ran the case for the worker in Holmes v Torbay Constructions Pty Ltd [2026] FWC 552 because he believed that across Australia, thousands of workers are engaged as so-called "contractors" despite performing work that appears indistinguishable from that of employees and the consequences can be significant.

Workers who are incorrectly classified as contractors may lose access to:

• Annual leave;

• Personal leave;

• Public holiday entitlements;

• Superannuation contributions;

• Unfair dismissal protections;

• Redundancy pay;

• Workers' compensation benefits;

• Minimum award wages and conditions.

This practice is commonly referred to as sham contracting.

The Fair Work Act 2009 contains specific provisions designed to prevent employers from disguising employment relationships as independent contracting arrangements.

A recent Fair Work Commission decision involving MYUNION client Matthew Holmes and Torbay Constructions Pty Ltd provides an important reminder that labels alone do not determine the true nature of a working relationship.

Holmes v Torbay Constructions Pty Ltd [2026] FWC 552

What Is Sham Contracting?

Sham contracting occurs when an employer:

• Misrepresents an employment relationship as an independent contracting arrangement;

• Dismisses or threatens to dismiss an employee in order to engage them as a contractor;

• Knowingly makes false statements to persuade a worker to become a contractor.

These protections are found in Part 3-1 of the Fair Work Act.

The legislation recognises that employers may seek to reduce labour costs and avoid employment obligations by classifying workers as contractors.

However, the law looks beyond labels and examines the reality of the relationship.

Simply calling someone a contractor does not make them one.

Employee or Contractor? The Real Test

Australian courts have repeatedly held that the true nature of a relationship depends upon the totality of the relationship.

Factors commonly considered include:

Control

Who directs the work?

Employees are generally subject to the employer's direction and control.

Integration

Is the worker part of the business?

Employees are usually integrated into the employer's enterprise.

Delegation

Can the worker send someone else to perform the work?

Contractors often possess a genuine right to delegate.

Equipment

Who supplies the tools and equipment?

Financial Risk

Does the worker bear commercial risk?

Method of Payment

Is the worker paid for time worked or for delivering a result?

Ability to Generate Profit

Can the worker increase profit through business efficiencies?

No single factor is determinative.

The entire relationship must be considered.

The Importance of Recent High Court Authority

The High Court has recently emphasised the significance of the contractual relationship itself.

In:

CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 the High Court confirmed that where parties have committed their relationship to a comprehensive written contract, the terms of that contract assume particular significance when determining whether a person is an employee or contractor.

However, courts and tribunals continue to examine whether the practical reality of the arrangement aligns with the contractual description.

A contract describing a person as an independent contractor is not necessarily conclusive if the relationship operates differently in practice.

Holmes v Torbay Constructions Pty Ltd [2026] FWC 552

In Holmes v Torbay Constructions Pty Ltd [2026] FWC 552, the Fair Work Commission was required to determine whether it possessed jurisdiction to deal with Mr Holmes' application under section 365 of the Fair Work Act.

A central issue was whether Mr Holmes was an employee or an independent contractor.

This question was critical because many Fair Work Act protections rely upon the existence of an employment relationship.

If a worker is genuinely operating an independent business, many employee-specific protections may not apply.

The Commission therefore examined the nature of the working relationship between the parties.

Why Classification Matters

The distinction between employee and contractor is not merely technical.

It can determine whether a worker has access to:

General Protections Claims

Employees may pursue remedies where adverse action is taken because they exercised workplace rights.

Unfair Dismissal Protection

Only eligible employees can bring unfair dismissal applications.

Award Coverage

Employees may be entitled to award wages and conditions.

Leave Entitlements

Employees generally accrue annual leave and personal leave.

Superannuation

Different obligations may arise depending upon the nature of the relationship.

Workers Compensation

Coverage can vary significantly.

The classification question therefore has substantial financial and legal consequences.

Common Indicators of Sham Contracting

Workers should be cautious where they are told they are contractors but:

• Work exclusively for one business;

• Wear company uniforms;

• Use company systems;

• Follow company rosters;

• Cannot subcontract work;

• Must seek permission for leave;

• Have little or no commercial independence;

• Are paid hourly rates rather than for completed projects;

• Are supervised like employees.

These factors may indicate that the worker is operating as an employee despite the contractual label.

Why Some Businesses Use Contractor Arrangements

Most businesses engage contractors lawfully.

There is nothing improper about genuine independent contracting.

However, problems arise where the arrangement is used to avoid employment obligations.

Potential motivations can include:

• Avoiding leave entitlements;

• Reducing payroll costs;

• Avoiding superannuation obligations;

• Limiting unfair dismissal exposure;

• Reducing workers compensation premiums.

The Fair Work Act specifically prohibits arrangements designed to disguise employment relationships.

Practical Lessons for Workers

The Holmes decision highlights an important lesson.

Workers should never assume that a written contract determines their legal status.

Questions worth asking include:

• Who controls my work?

• Can I work for others?

• Do I operate a genuine business?

• Do I carry commercial risk?

• Can I delegate work?

• Am I integrated into the employer's business?

The answers may reveal that a purported contractor arrangement is actually an employment relationship.

Practical Lessons for Employers

Businesses should ensure that contractor arrangements are genuine.

A written agreement alone may not protect against scrutiny.

Employers should ensure that:

• Contractors retain genuine independence;

• Commercial risk is appropriately allocated;

• Delegation rights are genuine;

• Contractors operate separate businesses;

• Day-to-day management is consistent with independent contracting.

Failure to do so may expose the business to significant liabilities.

Why Sham Contracting Laws Exist

Sham contracting laws are designed to preserve the integrity of Australia's workplace relations system.

Without these protections, businesses could simply re-label employees as contractors and avoid minimum workplace standards.

Parliament recognised that workers often possess significantly less bargaining power than employers.

The legislation therefore seeks to prevent vulnerable workers from losing fundamental workplace protections through artificial contractual arrangements.

Conclusion

The decision in Holmes v Torbay Constructions Pty Ltd [2026] FWC 552 serves as another reminder that workplace rights depend upon the true nature of a working relationship rather than the label attached to it.

For workers, the case highlights the importance of understanding whether they are genuinely operating an independent business or functioning as employees.

For employers, it reinforces the need to ensure that contractor arrangements reflect genuine commercial independence rather than an attempt to avoid employment obligations.

Where uncertainty exists, the reality of the relationship—not merely the wording of a contract—remains central to determining workplace rights and protections under Australian law.