Contractor or Employee? How Australia Decides

A designer works three days a week for one agency, at the agency's desk, on the agency's laptop, to the agency's hours. She has an ABN and sends an invoice each fortnight, and her contract calls her an independent contractor. Is she one?

Quite possibly not. In Australia, what the paperwork calls the relationship is only part of the picture. This guide explains how the law tells a contractor from an employee, why it matters to both sides, and what to do if the label doesn't match how the work really happens.

This article is general information, not legal advice. Worker status depends on the facts of each arrangement. If the answer matters to you, get advice or contact the Fair Work Ombudsman.

Why the Difference Matters

Employees and contractors have very different entitlements, and the person paying has very different obligations.

• An employee is entitled to at least the minimum wage or award rate, paid leave (unless casual), superannuation, notice of termination, and protection from unfair dismissal. The employer withholds tax from their pay and covers workers compensation
• An independent contractor runs their own business. They set their price, invoice for the work, manage their own tax and insurance, and are not entitled to leave or minimum wages. In return they keep control over how, when and for whom they work

Getting it wrong is expensive. A business that treats an employee as a contractor can owe years of back pay, leave and super, plus penalties.

The Test: The Whole Relationship, Not Just the Label

Since 26 August 2024, the Fair Work Act has used what is called the whole of relationship test. Whether someone is an employee is decided by the real substance, practical reality and true nature of the relationship. That means looking at both the written contract and how the work is actually carried out day to day.

The Signs That Point Each Way

No single factor decides it. The whole arrangement is weighed up, using indicators like these:

Points towards employee

• The business controls how, when and where the work is done
• Set or expected hours, and an ongoing role rather than a defined job
• Paid by the hour, week or by a regular wage, regardless of results
• Must do the work personally and cannot send someone else
• Uses the business's tools, equipment, email address or uniform
• Carries no financial risk if the work goes badly
• Works as part of the business, and for that business only

Points towards contractor

• Decides how the work is done and often when and where
• Engaged for a specific project or result, with an end point
• Quotes a price and is paid for the outcome, usually on invoice
• Free to subcontract or delegate the work
• Supplies their own tools and equipment and covers their own costs
• Bears the risk: fixes defects at their own expense and can make a loss
• Free to work for other clients, and usually does

Back to the designer. Fixed days, the agency's desk and laptop, the agency's hours, one client and paid by time. Most of the indicators point towards employment, whatever her contract says.

What Is Sham Contracting?

Sham contracting is when a business tells a worker they are an independent contractor when they are really an employee. It is unlawful under the Fair Work Act, as is dismissing or threatening to dismiss an employee in order to re-engage them as a contractor doing the same work.

The defence available to a business is narrow. It must show that it reasonably believed the arrangement was genuine contracting. Simply not having thought about it is not enough. Courts can order penalties as well as repayment of everything the worker should have received.

Super and Tax Are Decided Separately

This catches many businesses out. Superannuation and tax have their own rules, applied by the ATO, and they do not always line up with the Fair Work answer.

• Super. A contractor who is paid wholly or mainly for their personal labour can be treated as an employee for super purposes. If so, the business must pay super guarantee contributions (currently 12%) on top of what it pays them, even though they invoice with an ABN
• Tax. A genuine contractor handles their own income tax and GST. If the worker is really an employee, the business should have been withholding tax under PAYG

The ATO has a free employee or contractor decision tool that gives a business an answer for tax and super purposes.

Protections Genuine Contractors Do Have

Being a real contractor does not mean having no rights. Contractors are protected against adverse action and coercion, and against sham arrangements. Since August 2024, a contractor earning below the contractor high income threshold ($190,100 for 2026-27) can also ask the Fair Work Commission to deal with unfair terms in a services contract. And like anyone in business, a contractor can recover unpaid invoices. See what to do when a client won't pay your invoice.

If You Think You Have Been Misclassified

• Write down how the work really happens: who sets your hours, whose equipment you use, whether you could send someone else, whether you have other clients
• Keep your records: the contract, invoices, rosters, messages giving you instructions
• Raise it with the business in writing. Some arrangements are honest mistakes and get fixed
• Contact the Fair Work Ombudsman, which gives free advice and can investigate, and the ATO about unpaid super

If You Hire Contractors

Check each arrangement against the indicators above, and be honest about the answer. Then make sure the reality and the paperwork match:

• Engage contractors for a defined scope and result, not an open-ended role
• Let them decide how the work is done, and don't roster them like staff
• Don't stop them working for others, beyond a genuine conflict of interest
• Check whether super is payable even where they are a genuine contractor
• Review the arrangement if it changes. A three-month project that becomes a two-year desk job is a different relationship

Where a Written Agreement Fits

A written agreement cannot turn an employee into a contractor. What it can do, for a relationship that is genuinely contracting, is record the things that make it so: the scope and deliverables, the price and payment terms, who supplies the tools, the right to delegate and to work for others, who owns the finished work, and how either side can end it. That clarity protects both people. Our guide to writing a freelance contract in Australia covers what to include, and you can create a freelancer agreement or a service agreement online.

Sources: Fair Work Ombudsman — Independent contractors, ATO — Employee or independent contractor, Fair Work Act 2009 (Cth) ss 15AA, 357.

Frequently Asked Questions

Does having an ABN make me a contractor?

No. An ABN is one small indicator. A person with an ABN who works set hours under a business's direction, for that business only, can still be an employee.

My contract says I am an independent contractor. Is that the end of it?

No. Under the whole of relationship test, the contract is considered together with how the work is carried out in practice. If the two differ, the practical reality counts.

Can I be a contractor if I only have one client?

Yes, it is possible, particularly on a defined project. But working for a single business over a long period is one of the indicators of employment, so the rest of the arrangement needs to look like genuine contracting.

Do contractors get superannuation?

Sometimes. If a contractor is paid wholly or mainly for their labour, the business engaging them may have to pay super guarantee contributions, even though they are a contractor for other purposes.

Can an employee agree to be treated as a contractor?

Agreement between the two people does not change the legal position. If the relationship is employment in substance, the employee entitlements apply. There is a limited opt-out that lets some higher earners choose to have the contract terms decide their status, which is worth getting advice on.

What can happen to a business that gets it wrong?

It can be ordered to back-pay wages, leave and other entitlements, pay unpaid super with additional charges, and pay penalties for sham contracting or breaches of the Fair Work Act.