If you’re scaling fast, freelancers look like a silver bullet: speed, flexibility, no headcount. But in Australia the line between “contractor” and “employee” has shifted, and the costs of getting it wrong now bite much harder.
This CEO-level guide from our employment law for employer lawyers maps the biggest legal risks of relying on freelancers vs hiring employees, what changed in 2024-2025, and the practical steps to stay compliant (and out of the headlines).
Key takeaways
The definition of “employee” changed in August 2024 under the Fair Work Act. Classification now looks at the whole relationship, not just the written contract (with limited exceptions).
Intentional wage underpayments become a criminal offence from 1 January 2025. Misclassification that leads to underpayments can escalate fast.
Contractors may still trigger employer obligations, including superannuation, payroll tax, workers’ comp, and WHS duties – even when they have an ABN.
IP ownership often sits with the contractor by default unless you have a clear assignment in writing.
Privacy and data risk travels with your vendors. You remain responsible for security and overseas disclosures of personal information handled by freelancers.
Snapshot: What changed for contractors in 2024-2025?
New definition of “employment”
From 26 August 2024, the Fair Work Act uses a whole-of-relationship test that considers the true substance of how work is performed (not just the contract wording).
Some businesses and workers still use the start-of-relationship test; high-income contractors can opt out of the whole-of-relationship test above a statutory threshold ($183,100 from 1 July 2025).
Sham contracting defence tightened
Since 27 February 2024, the defence shifted from “recklessness” to whether it was reasonable to think someone was a contractor – raising the bar on employers.
- Learn more about how to avoid sham contracting in our guide.
Wage theft laws
From 1 January 2025, intentional underpayments can be a criminal offence (separate to civil penalties).
The Big Legal Risks When You Rely on Freelancers
1. Misclassification: Fair Work liabilities
If a “contractor” is in substance an employee, you can face back-pay for minimum wages, leave, penalties, and fines, plus reputational damage.
The new whole-of-relationship test increases the focus on day-to-day control, integration, ability to delegate, financial risk and more.
2. Superannuation: contractors may be “employees” for SG
Even with an ABN, if you pay an individual mainly for their labour, they’re treated as an employee for Super Guarantee and you must pay super. This can apply retrospectively.
Learn more about super and payroll tax obligations for independent contractors in our guide.
3. PAYG withholding & GST: don’t assume
Generally, you don’t withhold PAYG from contractors unless you enter a voluntary agreement to withhold (and they still may charge GST if registered). Misclassification can often flip these obligations.
4. Payroll tax: contractor payments can be “wages”
Across states, payments to contractors can be deemed wages (with exemptions like the “90-day rule” in Victoria). If you’ve scaled through contractors, budget for payroll tax reviews.
5. Workers’ compensation: “deemed worker” rules
A contractor can be deemed a worker for workers’ compensation, pushing premium and claims exposure back onto your business – even where the contractor is incorporated.
6. Work health & safety (WHS): PCBUs can’t outsource duty of care
As a Person Conducting a Business or Undertaking (PCBU), you must ensure health and safety so far as is reasonably practicable, and consult and coordinate with other duty holders (including contractors). You can’t contract out of these statutory duties.
7. Intellectual property: default ownership often sits with the freelancer
In Australia, Intellectual Property (IP) created by employees in the course of employment usually belongs to the employer.
Contractors, by default, own what they create unless your contract assigns it (and you obtain moral rights consents where relevant).
To discover how to manage the ownership of ideas in your organisation, check out our article.
8. Confidentiality & privacy: you stay accountable
Under Australian Privacy Principle (APP) 11, you must take reasonable steps (including technical and organisational measures) to secure personal information – even when handled by third parties.
Under APP 8, you’re generally accountable for overseas disclosures made to freelancers. Bake security and cross-border terms into your contractor agreements.
9. Migration & visa status: “contractor” doesn’t avoid employer sanctions
It’s a criminal offence to employ, refer, coerce or contract a non-citizen who doesn’t have the right to work.
Make sure to implement right-to-work checks for contractors too.
Real-life Example
A Sydney SaaS scale-up engaged 25 “freelancers” for ongoing product and marketing work. They worked regular hours, used company systems, couldn’t delegate tasks, and were paid hourly.
Following a complaint, regulators assessed the workforce as employees. The company faced:
Back-pay for minimum wages and entitlements (2 years)
Superannuation for all affected workers
Payroll tax reassessment on contractor payments
A workers’ comp premium uplift after one contractor’s injury claim
An OAIC enquiry after a freelancer synced customer data to an overseas tool without controls
A forced IP assignment clean-up to secure code ownership before a Series B diligence
Total remediation and advisory costs: mid six figures – negating the “savings” of using freelancers.
CEO checklist: Make your Contractor Model Defensible
Map roles: Which work is truly project-based and outcome-driven (contractor-suitable) vs ongoing, integrated business as usual (employee-likely)?
Classify using current tests: Apply the Fair Work whole-of-relationship or start-of-relationship test (as applicable). Document your analysis.
Contract hygiene: Use services or contractor agreements with clear scope, deliverables, delegation rights, tools, insurances, and no employee-like controls.
Tax & super: Run the ATO employee/contractor analysis, if contracts are mainly for labour, pay the Superannuation Guarantee. Consider PAYG voluntary agreements where appropriate.
Payroll tax review: Test contractor payments against state deeming and exemptions; keep day-count evidence (e.g. Vic 90-day).
Workers’ comp: Confirm who is a deemed worker and ensure suitable coverage.
WHS controls: Treat contractors as part of your safety system. Include inductions, risk assessments, and consult/coordinate duties.
IP ownership: Insert current assignment of IP (and moral rights consents) in every contractor agreement.
Privacy & security: Vendor due diligence, data-minimisation, minimum controls (MFA, encryption), and APP 8 cross-border clauses.
Right-to-work: Verify visa/work rights for contractors too.
Frequently Asked Questions (FAQs)
If a contractor has an ABN and invoices me, are they a contractor?
Not necessarily. Regulators look at the true relationship, not the invoice header. Be sure to classify the relationship correctly from the start – reach out to Prosper Law today for more guidance.
Do I owe super to contractors?
Most likely, yes! If they are paid mainly for their labour, they’re employees for the purposes of the Super Guarantee and you must pay.
Do I need to withhold PAYG from contractor payments?
Generally no, unless you enter a voluntary agreement with the contractor (or they’re actually employees).
Can I contract out of WHS duties via a clause saying the contractor is responsible for safety?
No, definitely not! PCBUs cannot contract out of statutory WHS duties. This means you must still take reasonably practicable steps to ensure safety of contractors.
We regularly design contractor engagement frameworks that survive regulator scrutiny: classification audits, contractor templates, super/payroll tax reviews, WHS/Privacy addenda, and IP assignment clean-ups. If you’re scaling with freelancers (or cleaning up a legacy model) get in touch for a rapid risk assessment.
Who owns IP created by a freelancer?
Typically, the contractor by default – unless your agreement expressly assigns the intellectual property to you.
Remember: get moral rights consents from the start as well.
