Employee vs Contractor Basics

Many of the worker disputes we see start the same way: the business believed the person was a contractor because they had an ABN and sent invoices. Neither of those things decides the question — and when the classification is wrong, the liabilities for super, withholding and penalties sit with the business, often stretching back years.

Why the difference matters

• PAYG withholding. Wages to employees must have tax withheld; payments to genuine contractors generally do not, unless special rules apply.
• Super. Employees are entitled to super guarantee — and so are many contractors. A contractor paid wholly or principally for their labour is treated as an employee for super purposes even if they are a genuine contractor with an ABN. This extended rule catches a lot of small businesses.
• Entitlements. Leave, notice and other Fair Work entitlements attach to employees.
• State obligations. Payroll tax and workers compensation rules often capture contractor arrangements too, on their own tests.
• TPAR. If your business provides building and construction, cleaning, courier or road freight, IT, or security services, payments to contractors generally have to be reported on a Taxable Payments Annual Report by 28th August each year.

Getting it wrong can mean the super guarantee charge (which is not deductible), withholding penalties, and sham contracting exposure under the Fair Work Act — treating someone as a contractor to avoid employee entitlements attracts its own penalties.

The factors the ATO actually looks at

Following recent High Court decisions, the starting point is the rights and obligations in the written contract, with day-to-day conduct filling the gaps where there is no comprehensive written agreement. The recurring factors:

• Control — who decides how, when and where the work is done.
• Delegation — can the worker genuinely send someone else, or must they do the work personally.
• Basis of payment — a price for a result versus payment for time worked.
• Tools and equipment — who supplies the significant ones.
• Commercial risk — who wears the cost of fixing defective work.
• Independence — is the worker running their own business, or working in yours.

No single factor decides it. And several things that owners rely on decide nothing: having an ABN, issuing invoices, the contract being titled contractor agreement, industry custom, or the engagement being short-term.

What we commonly see go wrong

• A long-term contractor who works set hours, uses the business's equipment and takes direction like staff — a classic reclassification risk.
• Super never paid to labour-only contractors, leaving a super guarantee charge exposure that accumulates quietly across years.
• TPAR not lodged because the owner did not realise their industry was captured — cleaning and courier services surprise people most often.
• Workers asked to get an ABN as a condition of being hired, which is a red flag in itself.

When to get advice

Classification is worth reviewing when you take on a new worker, when a contractor arrangement becomes long-term, or before the ATO or Fair Work reviews it for you. A properly drafted contract that matches how the arrangement really operates, plus a documented super position for each contractor, resolves most of the risk — and is far easier to fix prospectively than retrospectively.

If a worker has an ABN and invoices me, are they a contractor?

Not necessarily. An ABN and invoices are not determinative — the classification turns on the contractual rights and the substance of the arrangement, and a worker with an ABN can still be an employee, or a contractor owed super.

Do I ever have to pay super for genuine contractors?

Yes. Where a contractor is paid wholly or principally for their labour, super guarantee generally applies as if they were an employee, even if the arrangement is otherwise a genuine contracting one.

What is TPAR and does it apply to my business?

The Taxable Payments Annual Report is an annual report of payments made to contractors, required for businesses in industries such as building and construction, cleaning, courier and road freight, IT and security services. It is due by 28th August each year, even if you only use a handful of contractors.