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The hidden cost of contractors
Updated: 1 day ago
Could your business be carrying an unexpected liability?
Most business owners don't deliberately get their contractor arrangements wrong.
They engage someone, agree on a fee, receive an invoice and pay it. The contractor has an ABN, looks after their own tax, and everyone's comfortable.
Simple enough.
But here's the risk that often gets overlooked: what happens when a contracting arrangement gradually changes, and nobody stops to consider whether your obligations have changed with it?
If an arrangement is incorrectly classified, the financial consequences can go well beyond the invoices already paid.
When contractor arrangements gradually shift
Consider a business that engages a consultant for a particular project.
Initially, the consultant determines how the work is completed, uses their own equipment, manages several clients and charges a project fee. A typical contracting arrangement.
Over time, however, the consultant starts working regular days, attending internal meetings, using company systems and taking instructions from management. Eventually, they're performing ongoing work alongside employees.
Nobody changes the contract. The consultant keeps invoicing. The business keeps paying.
But the practical working relationship now looks quite different.
For most private-sector businesses, the Fair Work Act requires consideration of the real substance, practical reality and true nature of the relationship, not just what the contract says.
A contractor agreement shouldn't be something you sign once and never look at again.
The numbers add up 1uickly
Consider a consultant engaged under an ABN at $95,000 per annum for 18 months.
Description | Amount |
Total contractor payments | $142,500 |
Illustrative unpaid super at 12% | $17,100 |
That's before considering Superannuation Guarantee Charge statements, statutory interest, administration charges, employment entitlements, payroll tax and workers' compensation adjustments.
A straightforward $142,500 arrangement could result in a considerably higher overall cost.
Common misconceptions
We pay them a higher rate to cover it.
Paying a higher contractor rate doesn't automatically resolve your obligations if the person should legally have been treated as an employee. Casual employees are still entitled to superannuation.
They've already paid tax on the income.
If payments should have been treated as wages, your business may have had PAYG withholding obligations. The worker declaring income in their returns doesn't automatically remove your obligations.
They're definitely a contractor, so we're covered.
Here's what many business owners don't realise: you can have a genuine independent contractor and still be required to pay superannuation for them.
Australian superannuation legislation has an extended definition of "employee" that can apply to individuals engaged principally for their personal labour.
Simply confirming someone is a contractor doesn't mean your compliance review is complete.
Five warning signs worth reviewing
They've become part of your regular workforce. Ongoing duties, staff meetings, integrated into normal operations.
You control how the work is performed. You direct hours, tasks, and methods, not agreeing on commercial outcomes.
They have little commercial risk. Paid for time regardless of outcome; you bear the cost of mistakes.
The work must be performed personally. No genuine ability to delegate or subcontract.
The arrangement hasn't been reviewed since it started. Requirements and responsibilities have changed substantially.
What should you be doing?
Review existing contractors. The greatest risks often sit with longstanding arrangements that have gradually changed.
Ensure agreements reflect reality. A well-drafted contract should match how you actually operate.
Consider superannuation separately. Even genuine contractors may trigger super obligations.
Reassess when circumstances change. An occasional project becoming regular work warrants a fresh look.
Get advice before problems arise. A review now beats several years of potential liabilities later.
Employee vs contractor checklist
Not sure whether your contractors are correctly classified?
Our practical checklist covers key indicators, superannuation considerations and common warning signs.
When did you last review your contractors?
At WLW Group, we help business owners identify commercial, tax, and superannuation risks and understand when specialist advice may be required.
A straightforward review today can prevent a much more expensive problem down the track.
Nijo Antony
Director