Contractor vs Employee
- Nijo Antony
- Aug 12
- 3 min read
Updated: Aug 25
When a Contractor Isn't a Contractor. The hidden rules that could turn your "independent" hire into an employee overnight.
Bringing in extra help can be a great way to get the job done, whether it's a one-off project or ongoing work. But here's the trap: just because someone has an ABN or sends you an invoice doesn't mean they're truly an independent contractor.
If the arrangement is one of employment, you could be hit with backdated super, payroll tax, leave entitlements, and even legal claims. And it's not just about the contract, it's about how the relationship works in practice.
Spot the Difference: Employee vs Contractor
The law applies a "multi-factor test" to decide. It looks beyond the paperwork to the real-world working relationship:
Factor | Employee | Contractor |
|---|---|---|
Control | You set how, when and where they work | They decide how to get the job done |
Tools & equipment | Supplied by you | Supplied by them, at their cost |
Hours | Set by you | Set by them |
Payment | Salary/hourly rate | Paid for a result, via tax invoice |
Risk | You carry the risk | They fix mistakes at their own cost |
Exclusivity | Usually only work for you | Can work for multiple clients |
Even with a contract in place, the courts (and the ATO) can look past it if the day-to-day reality says otherwise.
Why Some Contractors Are Treated Like Employees
Certain laws extend employee entitlements to contractors in specific situations:
Superannuation - If the arrangement is mainly for their personal labour and they can't delegate the work, you may have to pay super
Payroll tax - In most states, contractor payments count towards payroll tax unless you qualify for an exemption
Workers' compensation - Some contractors are deemed 'workers' and must be covered by your insurance.
Two Real-World Cautionary Tales
1. Twenty years as a "contractor", but legally an employee
A worker spent two decades with the same business, invoicing for his work and calling himself a contractor. The company assumed this meant they weren't responsible for things like leave, super, or unfair dismissal claims. But when the relationship was challenged, the court found he was an employee.
Why? Because:
The business controlled his day-to-day tasks
He used the company's vehicle and tools
He presented himself as part of the business team.
Despite the paperwork and invoicing, the reality showed an employment relationship. The company was left exposed to back pay, superannuation, and penalties.
2. Insurance agents: "independent" in name only
A large insurance company engaged its sales agents under "contractor agreements." The agents were paid on commission, used their own cars, and no tax was withheld from their pay. On the surface, it looked like contracting.
However, the court ruled they were employees because:
They were only allowed to sell the company's insurance policies
They worked under strict training, supervision, and direction
They had no real independence in how they operated.
In the end, the agreements didn't matter; the lack of freedom meant they were employees at law. The company faced significant liabilities for entitlements and compliance breaches.
What's at Stake if You Get It Wrong
Backdated superannuation, payroll tax, and leave payments
Underpayment claims under Modern Awards
Penalties and interest from the ATO or state revenue office
Unfair dismissal or other legal claims.
The WLW Group Tip
If in doubt, check before you hire. Download our free Contractor vs Employee Checklist. Use a written contract, but make sure your working arrangement matches the legal reality. The ATO has an online decision tool, but nothing beats tailored advice.
Contact WLW Group today to review your current contractor and employee arrangements and avoid a costly reclassification surprise.
Nijo Antony
Director
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