Contractor or Employee? The Label on the Contract No Longer Decides It

If you engage anyone in your business who isn't a full-time employee (eg. a bookkeeper, a designer, a delivery driver, a consultant), then this question is worth ten minutes of your time. Getting it wrong is one of the most common (and most expensive) mistakes small business owners make in Australia.

The old approach doesn't work anymore

For a long time, the safest way to think about this was: what does the contract say? If it said "independent contractor," and the person had an ABN and sent invoices, that was largely the end of the enquiry.

That changed on 26 August 2024. Amendments to the Fair Work Act introduced what's called the "whole of relationship" test. Under this test, the Fair Work Commission looks at the real substance, practical reality, and true nature of the relationship — not just what the contract says, but how it actually plays out day to day.

The written contract still matters. It's part of the evidence. But it's no longer the end of the conversation.

What actually gets looked at

When assessing whether someone is genuinely a contractor or, in substance, an employee, the factors that carry weight include:

• Control: how much say do you have over how, when, and where the work gets done?

• Financial risk: who bears the risk if something goes wrong or the work needs redoing?

• Equipment and tools: who supplies them?

• Ability to delegate: can the person send someone else to do the work, or does it have to be them personally?

• Integration: are they working in your business, structurally indistinguishable from your staff, or genuinely operating as their own business?

No single factor is decisive; it's the overall picture that matters.

Two traps that catch even careful business owners

One: An ABN doesn't settle anything. Plenty of genuine employees have ABNs, invoice monthly, and still get correctly reclassified as employees when a dispute arises.

Two: passing the Fair Work test doesn't mean you're in the clear everywhere. Superannuation has its own, separate test. Under section 12(3) of the Superannuation Guarantee (Administration) Act, someone engaged under a contract that's wholly or principally for their labour can be treated as an employee for super purposes, even if they're a legitimate contractor under the Fair Work test. 

Payroll tax "relevant contract" provisions in each state run their own tests too. There is no single universal answer that covers every question at once.

What it costs to get wrong

Misclassifying an employee as a contractor is called sham contracting, and it's a contravention of section 357 of the Fair Work Act. The consequences can include:

• Back-payment of wages, leave entitlements, and overtime

• Unpaid superannuation, often with several years of compounding

• Civil penalties: currently up to tens of thousands of dollars per contravention, and each pay period can potentially count separately

• Workers compensation and payroll tax exposure at the state level

For a small business, a single misclassified long-term "contractor" can turn into a five-figure liability without much difficulty.

What to actually do about it

You don't need a compliance department to get this right. A sensible process looks like:

1. List everyone you currently engage who isn't a standard employee.

2. For each one, honestly assess the factors above; not just what the contract says, but what’s actually happening in reality. 

3. Where the answer is unclear or uncomfortable, get the arrangement reviewed properly rather than guessing.

4. Fix contracts and, where necessary, entitlements going forward. This is far cheaper done proactively than in response to a claim.

Where Pradella Law fits in

This is exactly the kind of question that sits in the gap between "too small a matter to call a lawyer about" and "something I should have checked years ago." A contractor classification review is a bounded, fixed-fee piece of work — it doesn't require an ongoing engagement to get a clear answer.

If you've got contractors on the books and haven't had the arrangement reviewed recently, it’s time to check. Book a free discovery call and we'll tell you plainly whether it's worth a closer look.

This article is general information current as at the publication date and does not constitute legal advice. Your specific circumstances may lead to a different conclusion. Contact Pradella Law for advice tailored to your situation.