Contractor or employee: how do I tell?
The test for whether a worker is a contractor or an employee, the 6 factors that matter, and the super and penalty risks of getting it wrong.
Short answer
What the contract says the worker is does not decide it. A worker is an employee or a contractor based on how the relationship works. The law generally looks at the contract and the facts of the work. If you get it wrong, you may owe back pay, super, penalties etc.
Which test applies
Since 26 August 2024, companies, and sole traders and partnerships in the ACT and NT, use the whole of relationship test. It looks at the real substance, practical reality and true nature of the relationship, including the contract and how it is carried out (Fair Work Ombudsman).
Sole traders, partnerships and some other businesses in the states use the start of relationship test. It focuses mainly on what was agreed in the contract (Fair Work Ombudsman).
A contractor earning above the high income threshold can opt out of the whole of relationship test by written notice, currently $190,100 (Fair Work Ombudsman).
The 6 factors
| Factor | Likely employee | Likely contractor |
|---|---|---|
| Control | Employer tells them how, when and where to work | Individual decides how to do the work |
| Financial risk | Paid by the hour, no risk of loss | Quotes a price and bears the cost of fixing mistakes |
| Tools and equipment | You supply them | Individual supplies their own |
| Delegation | Does the work personally | Can send someone else or subcontract |
| Hours | Set hours or a roster | Sets own hours |
| Continuing work | Ongoing, open-ended work | A defined job or project |
These are the factors the Fair Work Ombudsman lists. No single factor decides it. Having an ABN, sending invoices or signing a “contractor agreement” doesn’t make someone a contractor if the rest points the other way.
Super applies to some contractors anyway
If you pay an individual (person) contractor mainly for their labour, they are an employee for superannuation purposes, even if they have an ABN. That applies when more than half the contract value is for their labour, they are paid for their time rather than a result, and they must do the work themselves (ATO).
The super guarantee is 12%, and from 1 July 2026 it must be paid for each payday (ATO). If you contract with a company, trust or partnership to achieve a result, you wouldn’t pay super for its workers (unless that was in the contract) (ATO).
Tax, payroll tax and workers compensation each have their own tests. A worker can be a contractor for one purpose and an employee for another.
Sham contracting
It is against the law to tell someone they are a contractor when you don’t reasonably believe it (and it wouldn’t be reasonable to believe it if you only say contractor to get out of certain payments, like super). It is also illegal to dismiss an employee, or threaten to, so you can re-engage them as a contractor for the same work (Fair Work Ombudsman). Courts can impose penalties, and the ATO can add the super guarantee charge and PAYG penalties (Fair Work Ombudsman).
Casual employees can become permanent
What about casual employees who might work irregular shifts? Keep in mind that the employee may give notice to change to permanent (full-time or part-time) employment under the employee choice pathway if they have been employed for at least 6 months (or 12 months for a small business) and believe they no longer meet the requirements of the casual employee definition. (Fair Work Ombudsman, Fair Work Ombudsman).
Casual employees often work shifts. Shifts can be a cause of dispute from unfair shift allocation and inconsistent rostering. The employer should be aware of the award and notice and consultation requirements for roster changes. Check the award; many require 7 days’ notice.
Employers should also ensure the people responsible for shift allocation do not ‘play favourites’, discriminate or give higher pay shifts to certain workers.
A quick check before you engage an employee or contractor
- Will they do the same job, the same hours, for you only, using your equipment? Likely an employee.
- Are you paying for a result or for their time? Paying for results, likely a contractor; paying for time likely an employee. Paying for time can mean you pay super, even for a contractor.
- Can they send someone else? If not, likely an employee.
- Ensure you write the contract to match how the work will really be done.
- Check again if the arrangement changes. The test looks at the relationship over time.
Templates that help
- Contractor Agreement and Purchase Order Terms or Consultant Agreement: for genuine contractors
- Full-time / Part-time Employment Agreement and Casual Employment Agreement or Casual Shift Employment Agreement: when the worker is an employee
This guide is general information, not legal advice for your situation. The Fair Work Ombudsman can’t decide whether someone is a contractor, so get advice if you’re unsure.