Is my contractor actually an employee?

Section 15AA of the Fair Work Act, which started on 26 August 2024, requires you to look at the real substance, practical reality and true nature of the relationship. That means considering the totality of the relationship: the written contract and how it is performed in practice.

This test applies to constitutionally covered businesses, which includes most Pty Ltd companies. Sole traders, partnerships and some other unincorporated businesses in New South Wales, Queensland, South Australia, Tasmania and Victoria still use the older start of relationship test. A contractor earning above the contractor high income threshold can also opt out of the new test in writing.

No single factor decides it, and these are indicators only. Fair Work looks at:

• Control. Do you direct how, when and where the work is done? Employees work under direction.
• Financial risk. Contractors carry the risk of profit or loss, are usually paid for a result and wear the cost of poor work. Employees are paid for their time whether or not the business profits.
• Tools and equipment. Employees generally use yours. Contractors usually bring their own.
• Delegation. Contractors can usually subcontract or send someone else. Employees must do the work themselves.
• Hours. Set hours point to employment. Contractors decide their own hours to get the job done.
• Ongoing work. Employees usually expect continuing work. Contractors are usually engaged for a specific task.

An ABN, invoices, a business name or the worker preferring to be a contractor don't change the answer.

Different laws use different tests, so the same worker can be treated differently for different obligations.

• Super. If you pay an individual under a contract that is mainly for their labour (more than half its value), for their personal skills rather than a result, and they must do the work themselves, they are an employee for super guarantee purposes. You must pay super for them even if they are a genuine contractor under the Fair Work Act.
• Tax. For PAYG withholding, the ATO focuses on the legal rights and obligations in your contract with the worker.
• Companies and trusts. If you contract with a company, trust or partnership, the people it sends aren't your employees for tax and super.

Getting it wrong can mean the super guarantee charge (which costs more than the super itself), PAYG withholding penalties, and back pay of award wages and leave.

It is unlawful to tell a worker they are a contractor when they are actually an employee, unless you can show you reasonably believed they were a contractor. It is also unlawful to dismiss, or threaten to dismiss, an employee so you can re-engage them as a contractor for the same work, or to knowingly make false statements to convince them to switch. Courts can impose penalties on businesses and on individuals.

If you're unsure, review how the arrangement works in practice, not just the paperwork. A Sprintlaw lawyer can review your contractor agreement and working arrangements for a fixed fee.