Contractor vs Employee? What Changed in Australian Law

The test for who counts as an employee has changed. An ABN and a signed contract no longer settle it. Here is what actually decides the question now.

For several years the safe answer was reassuringly simple: if you had a well-drafted contract saying someone was an independent contractor, that was largely the end of the argument. That is no longer the position, and a lot of businesses have not caught up.

Getting this wrong is expensive in a way that compounds. A worker found to have been an employee all along may be owed unpaid leave, superannuation, notice and award entitlements going back through the whole engagement, and the business may face penalties on top.

Contractor vs employee: what the test is now

So what is the difference between a contractor vs employee? The Fair Work Act was amended so that whether someone is an employee or a contractor is determined by the real substance, practical reality and true nature of the working relationship. The whole relationship is considered, not just the terms written into the agreement.

In plain terms, the contract is evidence, not the verdict. What you both actually do day to day carries weight again, which reverses the more contract-focused approach that applied following earlier High Court decisions.

There is also a pathway for genuinely independent, higher-earning contractors to opt out of the new definition. That is a specific mechanism with its own requirements, not a general escape hatch, and it needs advice rather than assumption.

What actually gets looked at

No single factor decides it. The question is what the overall picture shows.

Factor	Points toward employee	Points toward contractor
Control	You direct how, when and where the work is done	They decide how the work gets done
Business	They work within your business	They run their own business and serve other clients
Delegation	They must perform the work personally	They can genuinely subcontract or send a substitute
Tools and equipment	You supply them	They supply their own and bear the cost
Financial risk	They carry none	They can make a loss or must rectify defects at their own cost
Payment	Regular amount for time worked	Per result, quoted or invoiced by the job
Presentation	They appear to the world as part of your business	They present as their own brand

Three things that do not settle it

• An ABN. Anyone can hold one. It says nothing about the nature of the relationship.

• A contract that says "independent contractor". A label that does not match the practical reality carries very little weight.

• The worker preferring it that way. The characterisation is not something the parties can simply agree to. Employee entitlements cannot be contracted away by consent.

Deliberately misrepresenting an employment relationship as a contracting one is sham contracting, and it is separately prohibited.

Superannuation catches people out separately

Even where someone is genuinely a contractor at common law, superannuation can still be payable if the contract is wholly or principally for their labour. Businesses routinely discover this years later, and the liability is not small once interest and charges are added. Treat super as its own question rather than assuming it follows the contractor label.

What to do about it

1. List every contractor you currently engage, with how long they have been engaged and what they do.

2. Flag the long-term, single-client ones first. Someone who has worked mainly for you for years, using your equipment, on your schedule, is where the risk concentrates.

3. Compare practice against the table above, honestly. Describe what actually happens, not what the agreement says should happen.

4. Check the superannuation position separately for each one.

5. Fix the arrangement or fix the paperwork. Either change how the relationship operates so it genuinely reflects a contracting arrangement, or convert the person to employment properly. Leaving a mismatch in place is the one option with no upside.

Getting help with it

P&P Consulting reviews contractor arrangements, drafts contractor agreements that reflect how the relationship actually works, and advises on conversions to employment where that is the right answer. Ad hoc advice is $180 per hour, and a full HR audit covering contracts, classifications and compliance is $795 excluding GST.

Book a free initial consultation if you have contractors you are not completely confident about.

Frequently asked questions

Does having an ABN make someone a contractor?

No. An ABN is a tax registration and anyone can obtain one. Whether a person is an employee or a contractor depends on the real substance and practical reality of the working relationship, assessed as a whole. Plenty of people who have been engaged under an ABN for years have been found to be employees.

Can a worker agree to be a contractor?

Not effectively. The characterisation is determined by the nature of the relationship, not by what the parties call it or prefer. Statutory entitlements cannot be given up by agreement, so a worker's consent does not protect the business if the arrangement is really employment.

Do I have to pay superannuation for contractors?

Sometimes. Superannuation can be payable where a contract is wholly or principally for a person's labour, even if the person is a genuine contractor for other purposes. This is assessed separately from the employee or contractor question, so check it on its own rather than assuming one answer covers both.

What is sham contracting?

Sham contracting is representing an employment relationship as an independent contracting arrangement, typically to avoid entitlements. It is separately prohibited under the Fair Work Act, and the consequences sit on top of any back-payment owed. Genuine mistakes are treated differently from deliberate misrepresentation, but the exposure is real either way.