Avoiding worker misclassification: what licence applicants need to know

2 October 2025
Avoiding worker misclassification: what licence applicants need to know

The misuse of independent contracting arrangements in labour hire can increase the risk of harm to workers, and the Labour Hire Authority (LHA) undertakes a range of compliance and licensing activities when it is identified.

Businesses may misclassify workers as independent contractors because they mistakenly believe that PAYG withholding tax, superannuation, workers’ compensation and payroll tax obligations do not apply if workers are engaged as independent contractors.

This risk increases in industries with high labour input, low wages and limited training, such as commercial cleaning, horticulture, meat processing and security.

In reality, a business’s legal obligations to workers are often similar or identical, regardless of whether they are engaged as employees or as independent contractors.

Keeping on the right side of the law while engaging workers as independent contractors can be much more complex and involved than providers realise.

As well as being unfair to workers, employee misclassification and related breaches can disadvantage legitimate businesses, by making it harder for them to compete and win contracts against companies with artificially low-cost structures.

Targeting misclassification of workers to reduce harm

Misclassification of employees as independent contractors is a strategic focus for LHA because of the significant harm:

  • to workers, through undercutting minimum wages set in the modern award or enterprise agreement and the perceived ability to avoid other legal obligations such as superannuation and portable long service leave
  • to the community, through the avoidance of taxation obligations such as PAYG withholding and payroll tax, and failing to pay adequate premiums for workers’ compensation
  • to compliant businesses, which are unfairly disadvantaged when competing against non-compliant providers that have unlawfully lowered their costs.

LHA pays close attention to businesses that intend to supply workers as independent contractors. 

Labour hire workers may be misclassified as independent contractors:

  • regardless of them being engaged under an Australian Business Number (ABN)
  • if working as part of the labour hire provider or host’s business, rather than genuinely conducting their own business
  • if subject to control about how their work is performed, as an employee would be.

If workers have been misclassified, LHA can take a variety of actions, including educating the applicant about the laws, imposing conditions or refusing to grant a labour hire licence.

Sometimes misclassification can be a genuine mistake, and applicants may not understand the meaning of ‘independent contractor’. Licensing Officers provide education to applicants intending to engage workers as independent contractors if there appears to be a risk of misclassification.

Preventing worker misclassification in horticulture

Recently, a company intending to operate in the horticulture industry applied for a labour hire licence. The applicant told LHA they intended to engage workers as independent contractors to perform duties such as picking, packing, sowing, planting, cultivating and harvesting.

LHA officers held concerns the workers were incorrectly classified and should be employees because their proposed duties ordinarily involved providers and/or hosts being able to exercise control over workers performing these activities (such as ability to set hours, set placements or give directions). This is a strong indicator of employment.

LHA officers’ concerns were heightened as workers in the horticulture industry are particularly vulnerable to exploitation, and misclassifying employees as independent contractors is perceived or utilised by some businesses in the industry as a method of exploiting workers.

LHA officers requested further information about the classification of workers and provided the applicant with education about the difference between independent contractors and employees and LHA’s guidance on worker classification.

In response, the applicant agreed to engage the workers as employees, meaning they were protected by the terms and conditions of the Horticulture Award, received superannuation contributions and were covered by workers’ compensation insurance. LHA applied conditions to their licence to monitor compliance.

Four months after the licence was granted, LHA obtained information relating to all employees and contractors, including full names, job titles and the industrial instrument governing their employment.

LHA also received a payroll summary report and profit and loss statement which confirmed the licence holder was not engaging any independent contractors.

Addressing sham contracting in the commercial cleaning industry 

An applicant in the commercial cleaning industry was intending to engage ten workers as independent contractors to perform general cleaning duties in offices and apartment buildings. The work would be both short-term and ongoing in nature and workers would be paid ‘per job’ at the ‘market rate’ of $35 per hour and responsible for contributing to their own superannuation.

The company stated the decision to classify workers as independent contractors was based on the industry standard and the need for flexibility.

LHA was concerned about the reasons for engaging independent contractors and contacted the applicant. The director of the company was unable to explain the tax and superannuation obligations for independent contractors who are engaged as labour hire workers.

LHA educated the director on the legal obligations and the risks of engaging in sham contracting. After the discussion, the director committed to engaging all ten workers as casual employees.

Preventing worker misclassification in the building and construction industry

In another case, a company applied for a licence to operate in the building and construction industry intending to engage six independent contractors as general labourers.

When LHA asked for the reasons for engaging these workers as independent contractors, the director said the decision was based on flexibility required due to the temporary nature of the work. The director also advised the labourers would require their own tools and equipment and would be responsible for managing their own tax and insurance.

The director stated that their pay rates meet or exceed the minimum casual rates stipulated under the Building and Construction General On-site Award. The director provided LHA with a rates table for independent contractors.

LHA identified some instances where the rates table fell below the Award hourly rate and that the applicant had not considered the additional costs borne by the independent contractor of paying their own superannuation, tax and insurance.

To assess concerns the arrangement may exploit workers, LHA sought further information about:

  • the level of control the labourers would have over their work, including who decides when and how the work is performed
  • their ability to subcontract work to someone else
  • the provision of tools and equipment
  • the risk of injury and defects.

These checks were made to ensure that the independent contractors were correctly engaged and to check if the director had considered using casual employees instead of independent contractors.

The director confirmed that the labourers were serving in the business and not carrying on their own independent business.

After discussions with LHA, the director confirmed they will now engage casual employees under the Award. The director committed to letting LHA know if it had a future need to engage an independent contractor.

LHA granted the licence with conditions which required the company to provide a statutory declaration within four months of being granted a licence providing information about the workers, a payroll employee summary report, and profit and loss statement.

These licence conditions enable LHA to support compliance with the requirements of the Labour Hire Licensing Act 2018 (Vic).

More information

LHA has published guidance for labour hire providers around engaging workers as independent contractors to help ensure providers:

  • comply with legal obligations
  • correctly classify workers
  • avoid the risk of licensing action.