Contractor/Employee

Employee or Independent Contractor?

Whether a worker is an employee or an independent contractor can have significant consequences for a business engaging them.

The distinction can affect obligations concerning wages, leave, superannuation, taxation, workers compensation and other workplace requirements.

Simply calling someone a contractor in an agreement does not necessarily make them one. The legal character of the relationship depends upon the applicable test and the circumstances of the particular arrangement.

The Whole of Relationship Test

From 26 August 2024, constitutionally covered businesses generally use the “whole of relationship” test under the Fair Work Act 2009 when determining whether a worker is an employee or independent contractor.

This test considers the real substance, practical reality and true nature of the relationship.

Both the terms of the contract and the way the relationship operates in practice can be relevant.

A business should therefore consider the actual working arrangement rather than relying solely upon the description given to the worker in a written agreement.

Which Businesses Use This Test?

The whole of relationship test generally applies to constitutionally covered businesses. A company with “Pty Ltd” or “Ltd” in its name will usually fall within this category.

Different rules can apply to some state-referred businesses, including sole traders, partnerships and certain other entities in New South Wales.

The applicable test can also depend upon when the work was performed and, in limited circumstances, whether a high-income contractor has opted out of the whole of relationship test. From 1 July 2026, the contractor high-income threshold is $190,100. A worker earning above that threshold may be able to opt out by giving the required written notice, in which case the start-of-relationship test may apply instead. See Fair Work Ombudsman guidance on opting out of the whole-of-relationship test.

Factors Used to Determine Whether Someone is an Employee or Contractor

No single factor will necessarily determine whether a worker is an employee or independent contractor.

Relevant considerations can include:

• the degree of control over how the work is performed;
• whether the worker bears financial risk and has an opportunity to make a profit;
• who provides the tools and equipment;
• whether the worker can delegate or subcontract the work;
• how working hours are determined;
• whether there is an expectation of continuing work; and
• the terms of the contract and, where applicable, how the arrangement operates in practice.

These factors must be considered together in the context of the particular relationship.

Control Over the Work

An employee will commonly perform work subject to a greater degree of direction and control by the employer.

An independent contractor will generally have greater control over how the contracted services are provided.

However, control is only one factor and the existence of some direction or supervision does not automatically determine the relationship.

Financial Risk and Opportunity for Profit

An independent contractor commonly operates their own business and may bear commercial risks associated with providing the contracted services.

This may include responsibility for rectifying defective work, managing business expenses and determining how to perform the work profitably.

An employee generally does not bear the same commercial risk in performing their work.

Tools and Equipment

Who supplies significant tools and equipment can be relevant when determining the nature of the relationship.

A contractor may provide their own equipment and meet the associated operating expenses, while an employer will commonly provide employees with the equipment necessary to perform their work.

Providing your own tools, however, does not automatically make you an independent contractor.

Delegation and Subcontracting

The ability to delegate or subcontract work can indicate an independent contracting relationship.

An employee is ordinarily engaged to provide their personal service and generally cannot simply engage another person to perform their employment duties for them.

The actual terms and operation of any delegation right should be considered rather than merely inserting a subcontracting clause into an agreement.

ABNs and Invoices Do Not Decide the Question

A worker does not automatically become an independent contractor because they:

• have an Australian Business Number (ABN);
• issue invoices;
• are described as a contractor;
• provide some of their own tools;
• are paid an hourly rate or by result; or
• have signed an independent contractor agreement.

These matters may form part of the overall assessment, but the applicable legal test must still be applied to the relationship.

Superannuation and Tax Can Have Different Rules

Businesses should also be aware that the definition of employee can differ between different areas of law.

A person who is an independent contractor for some purposes may still fall within extended statutory definitions relevant to obligations such as superannuation.

Taxation, superannuation and workers compensation requirements should therefore be considered separately where necessary.

What is Sham Contracting?

Sham contracting can occur where an employer represents to a worker that they are an independent contractor when the worker is actually an employee and the employer does not reasonably believe the worker is a contractor.

It is also unlawful in certain circumstances to dismiss or threaten to dismiss an employee in order to engage them as a contractor to perform the same or substantially the same work.

Businesses should not use contractor arrangements simply as a means of avoiding employee entitlements.

Review Contractor Arrangements Regularly

The practical operation of a working relationship can change over time.

A contractor who originally operated independently may gradually become integrated into the business, work regular hours, take increasing direction from management or otherwise operate differently from the arrangement originally contemplated.

Where the whole of relationship test applies, these changes may affect the legal character of the relationship.

Businesses using contractors should therefore review significant contractor arrangements periodically rather than assuming the original classification will always remain correct.

Contractor Arrangements for Businesses

Incorrectly structuring a contractor arrangement can expose a business to significant legal and commercial consequences.

Russell Kelly & Associates can assist businesses with commercial agreements and contractual documentation for independent contractor arrangements, including reviewing the commercial terms of proposed engagements.

Where specialist employment-law advice is required, businesses should obtain advice from an appropriately qualified employment law practitioner.

Learn more about our Business & Commercial Law services.

Learn more about our Commercial Litigation services.

Speak to Russell Kelly & Associates

If your business is entering into or reviewing an independent contractor arrangement, we can assist with the commercial agreement and related contractual documentation.

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This information is general in nature. Worker classification and workplace obligations can depend upon the applicable legislation and the particular circumstances. Specialist employment, taxation, superannuation or workers compensation advice may be required.