Plenty of Australian businesses rely on contractors. It is a flexible way to bring in skills, cover busy periods or grow without taking on permanent staff. The problem is that calling someone a contractor does not make them one. If the working relationship looks like employment in practice, the law will treat it as employment, and the business can end up owing wages, leave, super and penalties it never budgeted for.
The rules have also moved in the past few years. The High Court changed the test in 2022, Parliament changed it back for Fair Work purposes in 2024, and super payment rules changed again in July 2026. Here is where things stand now, and what you can do to get the classification right.
Why the classification matters
Employees are entitled to minimum wages under the relevant award, paid leave, the National Employment Standards, super, and protection from unfair dismissal. Contractors generally are not. They run their own business, invoice for their work and look after their own tax, insurance and super.
When a worker is wrongly classified as a contractor, those employee entitlements do not disappear. They build up in the background. A claim can include back pay for award rates and overtime, unpaid leave, unpaid super plus the super guarantee charge, and civil penalties under the Fair Work Act. State payroll tax and workers compensation schemes have their own contractor rules, and contractors can also raise IP, privacy and WHS risks. We cover these in our guide to contractor risks for CEOs.
How the test works now
In 2022, two High Court decisions (commonly referred to as Personnel Contracting and Jamsek) held that where there is a comprehensive written contract, the question of whether someone is an employee should be answered mainly by looking at the contract itself, not at how the relationship played out day to day.
For Fair Work purposes, that approach no longer applies. Since 26 August 2024, section 15AA of the Fair Work Act requires courts and the Fair Work Commission to look at the “real substance, practical reality and true nature” of the relationship. The contract still matters, but so does how the work is actually done. The Fair Work Ombudsman calls this the whole of relationship test.
In practice, this means a well-drafted contractor agreement is no longer enough on its own. If the day-to-day reality looks like employment, the paperwork will not save the arrangement.
There are two points businesses often miss:
- The High Court approach still matters elsewhere: Section 15AA only applies to the Fair Work Act. Tax, super, payroll tax and workers compensation have their own tests, and the ATO’s guidance for tax and super still draws on the High Court’s contract-focused approach. The same worker can, in some cases, be treated differently under different laws.
- High earners can opt out: A contractor who earns more than the contractor high income threshold ($190,100 from 1 July 2026) can give the business a written notice opting out of the whole of relationship test. The earlier, contract-focused test then applies instead. The notice must come from the worker, and they can withdraw it later.
What the courts look at
There is no single deciding factor. Courts weigh up the whole picture, including:
- Control: Who decides how, when and where the work is done? The more direction the business gives, the more it looks like employment.
- Running their own business: Does the worker have other clients, their own branding, insurance and the ability to build goodwill, or do they work only for you?
- Delegation: Can the worker send someone else to do the job, or must they do it personally?
- Tools and equipment: Who supplies them? A contractor usually brings their own.
- Risk and reward: Does the worker bear the cost of fixing their own mistakes and the chance of making a profit or loss?
- How they are paid: Payment for a result or a completed project points towards contracting. An hourly rate, regular pay cycles and fixed hours point towards employment.
- Integration: Do they wear your uniform, use your email address, sit in your team meetings and appear to the outside world as part of your business?
A worker who is told when to start, uses your laptop, works only for you and is paid by the hour is at real risk of being found to be an employee, whatever the contract says.
Sham contracting
Sham contracting is when a business represents an employment relationship as an independent contracting arrangement. It is prohibited under sections 357 to 359 of the Fair Work Act. The law also prohibits dismissing an employee, or threatening to, so they can be re-engaged as a contractor doing the same work, and making knowingly false statements to persuade someone to become a contractor. We covered how this plays out in one industry in our article on sham contracting in architecture firms.
The defence became harder to meet from 27 February 2024. Previously, a business could avoid liability by showing it did not know, and was not reckless as to, the true nature of the relationship. Now the business must prove it reasonably believed the arrangement was a genuine contract for services. In deciding whether that belief was reasonable, a court can consider the size and nature of the business. “We didn’t know” is no longer a comfortable place to stand.
Even where the defence succeeds, the business can still be liable for underpaid wages and entitlements if the worker turns out to be an employee.
Super obligations for contractors
This is where many businesses get caught out. Under the superannuation guarantee rules, a contractor who is paid wholly or principally for their labour can be treated as an employee for super purposes, even if they are a genuine contractor for every other purpose. Having an ABN does not change this.
As a general guide, the ATO looks at whether the contract is mainly for the person’s labour and skills, whether they must do the work personally, and whether they are paid for their time rather than for a result. Where those boxes are ticked, the business must pay super at the current rate of 12%.
From 1 July 2026, Payday Super applies. Super for employees, including eligible contractors, must now be paid each payday and reach the fund within seven business days, rather than quarterly. If you have contractors on your books who meet the labour test and have not been set up in payroll, now is the time to fix that. The ATO matches fund data against Single Touch Payroll reporting, so late or missing super is easier to detect than it used to be.
Practical steps for businesses using contractors
Audit your current contractors: List everyone you engage on an ABN and ask the questions above for each one. Focus on long-term, full-time or single-client arrangements first, as these carry the most risk.
Use a proper independent contractor agreement: A tailored independent contractor agreement should set out the scope of work, how payment is calculated, who supplies equipment, the right to delegate, insurance, IP ownership and confidentiality. Avoid templates that borrow language from employment contracts, such as leave, set hours or performance reviews.
Make sure practice matches paper: Since August 2024, what happens day to day carries real weight. If the contract says the contractor controls their own hours but your manager sets a roster, the contract will not protect you.
Check super separately: A worker can be a genuine contractor and still be owed super. Assess each arrangement against the ATO’s labour test and document your reasoning.
Keep a record of your assessment: The sham contracting defence now depends on showing your belief was reasonable. A written record of why you classified each worker the way you did, reviewed from time to time, is strong evidence.
Review when things change: Classification is not a one-off decision. A short project that becomes an open-ended, full-time role may have become employment along the way. If you are unsure, speak to an employment lawyer before the relationship drifts too far.
Common questions about contractors and employees
Does having an ABN make someone a contractor?
No. An ABN is a tax registration, not a classification. The law looks at the substance of the relationship, not whether the worker has an ABN or sends invoices.
If our contract says “independent contractor”, are we protected?
Not for Fair Work purposes. Since 26 August 2024, the Fair Work Act looks at how the relationship works in practice as well as the contract. A label in the agreement is one factor, not the answer.
Do I have to pay super for contractors?
Sometimes. If a contractor is paid wholly or principally for their labour, super guarantee is likely to apply, and from 1 July 2026 it must be paid on payday.
What should I do if I think I have misclassified someone?
Get advice before you act. Terminating a worker and re-engaging them, or changing their arrangement without a plan, can create new risks. There may also be options to voluntarily correct unpaid super and limit the super guarantee charge. A legal health check is a good starting point if you are not sure where your gaps are.
Why it's worth getting advice
Contractor arrangements often start with good intentions on both sides. The worker wants flexibility, and the business wants a simple way to bring in help. The risk comes later, when the arrangement has grown into something that looks more like a job, and the paperwork has not kept up.
If you engage contractors on a regular basis, it is worth having a business contract lawyer check your agreements and how they operate in practice. Read more on the benefits of a contract review, or get in touch directly. We offer fixed-fee reviews, so you know exactly where you stand, and what needs to change, before a dispute or an audit tests it for you.
About the Author
Farrah Motley
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