For many businesses, especially in construction, trades and game development industries, one ongoing question keeps surfacing — are the people you hire truly independent contractors, or are they effectively employees under another name?
The Australian Taxation Office (ATO) regularly reviews contractor arrangements to ensure everyone is paying the correct tax and superannuation. Getting this wrong can mean unexpected liabilities for superannuation, workers’ compensation or payroll tax.
Some relationships are always clear-cut. Apprentices, trainees, labourers and trades assistants are considered employees. By contrast, entities such as companies, trusts or partnerships are always contractors.
Employees work in and are part of your business. Independent contractors provide services to a principal’s business.
How the courts view contractor arrangements
Two High Court decisions – CFMMEU v Personnel Contracting [2022] HCA 1 and ZG Operations v Jamsek [2022] HCA 2 – reshaped how employment relationships are assessed. The courts now focus on the written contract between the parties, rather than the broader “totality of the relationship”. This means that if your contracts clearly and accurately describe the nature of the arrangement, you are in a stronger position.
In practice, well-drafted agreements that outline each party’s rights and obligations carry more weight than day-to-day work practices alone.
What the ATO looks for
When determining whether someone is an employee or an independent contractor, the ATO considers several key factors:
| Employee |
Independent contractor |
| Control: Your business has the legal right to control how, where and when the worker does their work. |
Control: The worker can choose how, where and when their work is done, subject to reasonable direction by you. |
| Integration: The worker serves in your business. They are contractually required to perform work as a representative of your business. |
Integration: The worker provides services to your business. The worker performs work to further their own business. |
Mode of remuneration: The worker is paid either:
- for the time worked
- a price per item or activity
- a commission.
|
Mode of remuneration: The worker is generally contracted to achieve a specific result, and is paid when they have completed that result, often for a fixed fee. |
| Ability to subcontract or delegate: There is no clause in the contract allowing the worker to delegate or subcontract their work to others. The worker must perform the work themselves and cannot pay someone else to do the work for them. |
Ability to subcontract or delegate: There is a clause in the contract allowing the worker the right to delegate or subcontract their work to others. The clause must not be a sham and must be legally capable of exercise. |
Provision of tools and equipment: Your business:
- provides all or most of the equipment, tools and other assets required to complete the work; or
- the worker provides all or most of the tools, but your business provides them with an allowance or reimburses them for expenses incurred.
|
Provision of tools and equipment: The worker provides all or most of the equipment, tools and other assets required to complete the work, and you do not give them an allowance or reimbursement for the expenses incurred. The work involves the use of a substantial item that your worker is wholly responsible for. |
| Risk: The worker bears little or no risk. Your business bears the commercial risk for any costs arising out of injury or defect in their work. |
Risk: The worker bears the commercial risk for any costs arising out of injury or defect in their work. |
| Generation of goodwill: your business benefits from any goodwill arising from the work of the worker. |
Generation of goodwill: the worker’s business benefits from any goodwill generated from their work, not your business. |
No single factor determines the outcome – the overall rights and obligations set out in the contract are what matter most.
A worked example: Alex on the job site
Consider Alex, who recently started with a local building company as a labourer. There’s no formal contract – just a verbal agreement with the owner, a family friend.
Alex invoices fortnightly for hours worked, provides his own tools without reimbursement, and occasionally wears branded clothing from the business. His boss sets out tasks and explains how they should be completed but allows some flexibility in how Alex organises his day.
When applying the ATO’s factors:
- Control: The business directs methods and order of work → employee.
- Integration: Alex appears part of the business → employee.
- Payment: Based on hours, not results → employee.
- Subcontracting: No restriction, but not exercised → contractor.
- Equipment: Provides own tools → contractor.
- Risk: The business corrects errors → employee.
Overall, Alex would likely be deemed an employee even without a written contract, because of the level of control and integration in his daily work.
Why classification matters
Whether someone is an employee or contractor determines:
- Who must pay superannuation contributions
- Who covers workers’ compensation insurance
- Whether payroll tax applies
- The level of reporting and compliance through systems like Single Touch Payroll (STP) and Taxable Payments Annual Reports (TPAR)
Misclassification can result in significant back payments, penalties and compliance issues. As the ATO’s data-matching systems become more sophisticated, it’s more important than ever to ensure arrangements are correct and properly documented.
FAQ’s
What is the difference between an employee and an independent contractor?
An employee works within and is part of your business, while a contractor runs their own business providing services to yours.
Can I treat someone as a contractor if they have an ABN?
Not necessarily. Having an ABN alone doesn’t make someone a contractor — the nature of the working arrangement determines the classification.
Do I have to pay superannuation for contractors?
Yes, in some cases. If a contractor is paid mainly for their labour, you may still be required to make super contributions, even if they have an ABN.
What if the arrangement is verbal?
A verbal agreement can still create an employment relationship. The ATO and courts will look at how the work is performed and the obligations of each party.
How can I check if a worker is an employee or contractor?
The ATO’s employee/contractor decision tool can help you assess the correct classification.
Need help determining your contractor arrangements?
The rules around contractors and employees can be complex, and the consequences of getting it wrong can be costly.
LDB’s experienced tax and business advisory team, based in Blackburn in Melbourne’s City of Whitehorse, can help you review your contracts, assess risks, and ensure your business meets its obligations.
Call us on (03) 9875 2900 or get in touch online to discuss how income averaging could benefit you.
Or you can follow LDB on LinkedIn for tax and business advisory updates.
