Contractor or employee? Getting it right when you hire
When your business grows to the point of taking on help, one of the first decisions is whether that person is an employee or a contractor. It’s not a choice you can simply make by putting it in a contract, and getting it wrong can cost a lot, sometimes years later.
The basic difference
An employee works in your business. You direct how, when and where they work, provide the tools, pay them for their time, and carry the commercial risk.
A contractor runs their own business and provides services to yours. They control how the work is done, can usually delegate or subcontract it, supply their own tools, and take on the risk of making a profit or loss on the job.
Myths that cause problems
- “They have an ABN, so they’re a contractor.” An ABN doesn’t decide anything.
- “They’re short-term or casual, so they’re a contractor.” Short-term and casual workers can be employees.
- “We both agreed they’re a contractor.” The label in the agreement doesn’t decide it if the real relationship looks like employment.
How it’s decided
For tax and super, the ATO follows the 2022 High Court decisions and looks mainly at the legally binding terms of the written contract, together with how the relationship was set up, as long as the contract isn’t a sham. For workplace law, the Fair Work Act now looks at the real substance of the whole working relationship, including how it actually operates in practice.
Either way, the same factors keep coming up:
- Control. Who decides how the work is done, the hours and the location?
- Running their own business. Do they advertise, have other clients, set their own prices?
- Delegation. Can they send someone else to do the work, or must it be them?
- Risk. Who pays to fix mistakes? Can they make or lose money on a job?
- Tools and equipment. Who supplies them, and who pays?
- Payment. Paid for a result or a quote, or paid by the hour or week?
- Ongoing relationship. Is there an expectation of continuing work, like an employee?
The ATO’s employee/contractor decision tool is a useful first check.
Super: the extra trap
Even a genuine contractor can count as an employee for super guarantee purposes if they’re paid wholly or principally for their labour. That commonly catches tradespeople, cleaners and consultants paid by the hour for their own work. If it applies, you must pay super (currently 12%) on the labour component of what you pay them. From 1 July 2026, super for employees must be paid within days of each payday rather than quarterly [check: confirm Payday Super commencement and rules].
Other obligations
- PAYG withholding applies to employees. Contractors who don’t quote an ABN must have tax withheld at the top rate.
- Payroll tax. NSW payroll tax can apply to payments to some contractors under the relevant contract provisions, once your total wages exceed the threshold.
- Workers compensation. Some contractors are “deemed workers” for NSW workers compensation, so your policy needs to include them.
- TPAR. Businesses in industries such as building and construction, cleaning, couriers, IT and security must report payments to contractors to the ATO each year.
- Employee entitlements. Employees get leave, minimum award wages and protection from unfair dismissal. Back-paying them can be expensive.
What it costs to get wrong
If the ATO or Fair Work decides a contractor was really an employee, you can face unpaid super plus the super guarantee charge and interest, penalties for not withholding tax, payroll tax and workers compensation premiums, and back-payment of leave and award entitlements, all potentially going back several years.
Before you hire
Write down how the role will actually work, check it against the factors above, and get the contract right for how the relationship really operates. If it’s an employee, set up payroll, super and STP properly from the first pay. We’re happy to look at a proposed arrangement before you commit; it’s far cheaper than fixing it later. Payroll processing is quoted separately from our business packages.