A NSW shuttle bus operation that underpaid employees by pretending they were contractors has copped the stiffest fine ever handed out in the state as the result of fair work action.

Newcastle-based Happy Cabby company, which shuttles passengers from Newcastle to Sydney airport, engaged in sham contracting and displayed "wilful blindness" of workplace laws, a judge found.

As a result, seven employees aged between 50 and 71 were underpaid a total of $26,000 between January and November 2011.

In a judgement handed down on Friday the operator was fined $238,920 and its director Graeme Thomas Paff was ordered to pay an additional $47,784.

The total fine of $286,704 imposed in the Federal Circuit Court in Sydney represents a record for legal action by the Fair Work Ombudsman in NSW.

It is also one of the highest fines ever obtained by the the Fair Work Ombudsman in Australia, the agency said in a statement on Monday.

Happy Cabby was found to have misclassified the drivers as independent contractors rather than employees, which meant they were only paid a fixed rate and missed out on penalty rates and overtime.

The company also ignored a letter of warning sent by the Fair Work Ombudsman in January 2011, as well as rulings about their status by the ATO and the Administrative Appeals Tribunal.

Sham contracting leads to employees being denied workplace rights and entitlements, Fair Work Ombudsman Natalie James said.

"There are serious consequences for business operators who ignore warnings to comply with workplace laws and disregard employees' basic lawful entitlements," she said in a statement.

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