Australia sham contracting: is it illegal to call an employee a contractor?

Potentially, yes. Fair Work says sham contracting can occur when a business represents a worker as an independent contractor when the business does not reasonably believe that is correct. It is also unlawful to knowingly mislead an employee into becoming a contractor to do substantially the same work. Official source: Fair Work Ombudsman. Guide: https://getinstantlaw.com/employment-workplace-problems