The Middleman Trap: A Warning for Australian Companies Using Offshore Staffing Agencies

This article is written for Australian businesses that currently engage offshore workers through a third-party staffing agency — and may not have considered whether that agency is actually employing those workers, or simply paying them as contractors.

If your offshore staffing agency pays your workers as contractors rather than employing them directly, Australian law may treat your business as their true employer — which means the fines, the back-pay liability, and since January 2025, the potential criminal exposure sit with you, not the agency.

Since the ruling, a number of businesses have come to us asking whether it applies to them — most in the context of hiring offshore contractors directly. It does. But the ruling carries an equally important implication that gets less attention: if your offshore staffing agency is the one classifying those workers as contractors rather than employing them directly, the same exposure applies to you. That is the scenario this article addresses.

In 2026, this is not a theoretical risk. The Fair Work Commission has already applied this principle to an offshore arrangement, and enforcement is tightening.

The Arrangement Most Businesses Are Running

The typical offshore agency model:

• An agency in the Philippines, Vietnam, or Malaysia supplies workers to your business
• Those workers are classified as "contractors" or "freelancers" by the agency
• You pay the agency a monthly fee (salary plus a margin)
• You manage the workers directly — setting hours, tasks, system access, and performance expectations

This model is common. It is also legally exposed in a way most Australian businesses have not assessed.

Why the Agency's Contractor Classification Does Not Protect You

Under Section 15AA of the Fair Work Act — introduced by the Closing Loopholes No. 2 Act 2024 — courts assess the "real substance, practical reality, and true nature" of a working relationship. What the agency calls the worker is one input. How the work is actually performed in practice is the primary test.

If you set the worker's hours, assign their tasks, provide their system access, and review their daily output, you are directing their work. The agency processing their pay does not change that in the eyes of the law.

The Fair Work Commission confirmed this directly in Pascua v Doessel Group Pty Ltd ([2024] FWC 2669, appeal refused [2025] FWCFB 43): a Filipino paralegal engaged through an agency arrangement, classified as a contractor, was found to be an employee of the Australian business that controlled her work. The Full Bench confirmed: "there is nothing preventing an Australian employer engaging an employee under a contract of employment to perform work overseas."

Geography is not a defence. The agency's payroll margin is not a defence. What matters is who directs the work.

What This Could Actually Cost You

Under Australian law, simply calling someone a "contractor" does not make it so. Courts and the Fair Work Ombudsman look at the actual working relationship, not the label. If your offshore workers are effectively controlled like employees — set hours, directed work, integrated into your team — you can be deemed the true employer, even if they sit overseas and are paid through an agency.

Here is where it bites.

Sham contracting penalties

If a worker is classified as an independent contractor but functions as an employee, it can breach the Fair Work Act 2009. Civil penalties apply per breach and add up fast:

• $93,900 per breach for corporations at the base civil penalty rate
• $469,500 per serious contravention — which applies when the employer knew or was reckless about the misclassification
• Each worker is counted as a separate breach

Back-pay liability

If workers are reclassified as employees, you may owe entitlements going back years:

• Minimum wages (including any shortfall against Australian rates where applicable)
• Superannuation at 12% of ordinary time earnings
• Annual and personal leave entitlements
• Overtime and penalty rates where hours were worked outside standard arrangements

This retrospective exposure is often the larger financial risk — and it compounds with every year the arrangement has been in place.

The tightened defence

The sham contracting defence narrowed under the Closing Loopholes No. 2 Act 2024. Previously, an employer needed to have acted "recklessly" for liability to apply. The test is now whether you "reasonably believed" the arrangement was compliant. If an employment advisor reviewing your setup would identify red flags, that belief is difficult to establish.

The One Question Your Offshore Partner Needs to Answer

Are the workers you supply to us employed by your agency — with local tax registration, employment contracts, and mandatory benefits — or are they classified as contractors or freelancers?

If the answer is the latter, the compliance gap is between you and your agency, and the risk of being found the true employer is material.

Ask for:

• Proof of local employment registration for each worker
• Evidence that mandatory local benefits are being paid (in the Philippines: 13th-month pay, SSS, PhilHealth, Pag-IBIG contributions)
• Confirmation of who signed the employment contract with the worker — your business, or the agency

If the agency signed an employment contract with the worker and can demonstrate it is the legal employer on the ground, the structure is sound. If workers were engaged as contractors with no local employment protections, and you direct their day-to-day work, the arrangement warrants immediate legal review.

The Practical Takeaway

Offshore agencies that use contractor classification to avoid local employment obligations do not transfer risk to themselves. Under current Australian law, that risk transfers to the business directing the work.

The question is not whether your agency charges a management fee. It is whether someone is legally responsible for employing these workers with the obligations that employment carries. If that is not clearly the agency, it may be you.

One final consideration: the agency has no incentive to raise this with the Fair Work Ombudsman, and neither does your business. But the worker — once the engagement ends and they understand what they may have been entitled to — is a different story. The complaints process is free, accessible, and entirely within their control.

This article is general information only and does not constitute legal advice. Speak with an employment lawyer to assess your specific offshore engagement arrangements.