Getting this wrong is expensive, and it's usually discovered years later: a worker makes a claim, a contractor is injured, the ATO reviews your super, or a state revenue office audits your payroll tax. By then the back pay, super, tax, interest and penalties have been building up the whole time.
This guide explains the tests as they stand for 2026–27, why the same worker can get different answers under different laws, what you owe a contractor for super and payroll tax, and how to avoid sham contracting. It's general information. If an arrangement is borderline, get it checked.
What's the difference between an employee and a contractor?
In plain terms:
- An employee works in your business. You control how, when and where the work is done. They're part of your organisation, paid for their time, use your tools, and don't carry the commercial risk of the work.
- A contractor runs their own business and provides services to yours. They decide how to do the job, can often delegate or subcontract, supply their own equipment, carry the risk of defects, and are usually paid for a result.
| Employee | Independent contractor | |
|---|---|---|
| Control over how work is done | You direct it | They decide, within the agreed scope |
| Hours and location | Set by you | Largely set by them |
| Payment | For time worked (wages, salary) | For results, usually by quote or invoice |
| Tools and equipment | Supplied by you | Supplied by them |
| Can delegate or subcontract | No | Usually yes, if the right is genuine |
| Commercial risk (fixing defects, injury cost) | Yours | Theirs |
| Goodwill | Builds your business | Builds their business |
| Works for others at the same time | Sometimes, but not as a business | Typically yes |
| Tax | You withhold PAYG | They manage their own tax; they quote an ABN |
| Super | You pay super guarantee | Often none, but see the labour rule below |
| Leave and award entitlements | Yes | No |
No single factor decides it. A courier with their own van can still be an employee. A consultant who works only for you for three years can still be a contractor. You weigh the whole picture.
What is the Fair Work whole-of-relationship test?
From 26 August 2024, the Fair Work Act includes a statutory definition of employee and employer (section 15AA). The question is the real substance, practical reality and true nature of the relationship. That means looking at the written contract and how the work is actually performed day to day.
This reversed the position set by two 2022 High Court decisions, which had confined the Fair Work question mainly to the written contract. For Fair Work purposes, a well-drafted contractor agreement no longer wins on its own if the reality looks like employment.
The factors weighed include control, integration into the business, who supplies tools, financial risk, the ability to delegate, the hours worked, and whether the work is expected to continue.
The contractor high income opt-out
A contractor who earns above the contractor high income threshold can give the business a written notice opting out of the whole-of-relationship test. If they do, the Fair Work question goes back to the terms of the contract. The threshold is indexed each 1 July; for 2026–27 it is $190,100 (it was $183,100 in 2025–26). Check the current figure and the notice rules on the Fair Work Ombudsman's opt-out page.
Key point: The Fair Work definition applies only to the Fair Work Act. The Fair Work Ombudsman says it doesn't change the meaning of "employee" for tax, super or workers compensation. You have to run the other tests separately.
How does the ATO decide employee or contractor?
For PAYG withholding, the ATO applies the common law as settled by the High Court in 2022: it looks at the legal rights and obligations in the contract (written, oral or implied). How the parties actually behave generally only matters if it shows the contract terms have changed, or the contract is a sham.
The ATO looks at the same kinds of indicators, read from the contract: control, integration, how pay is calculated, the right to delegate, tools and equipment, commercial risk, and goodwill. It stresses that no single indicator decides it and the label "contractor" proves nothing.
The ATO's free employee or contractor decision tool walks you through the questions and gives you a record of the result. It's a good first step. It isn't a substitute for reading the contract and the facts carefully when an arrangement is borderline.
Why the answers can differ
| Law | Test | What it looks at |
|---|---|---|
| Fair Work Act (wages, awards, leave, unfair dismissal) | Statutory whole-of-relationship test, from 26 August 2024 | The contract and how the work is actually done |
| Tax: PAYG withholding | Common law, as settled in 2022 | Mainly the terms of the contract |
| Super guarantee | Common law, plus an extended definition | Also catches contractors paid mainly for their labour |
| Payroll tax | State law: common law plus "relevant contract" provisions | Catches many contractor payments unless an exemption applies |
| Workers compensation | State and territory law, each with its own definition | Often wider than the common law; check your scheme |
So the honest answer to "is this person an employee?" is often "for which law?"
Do you have to pay super for contractors?
Sometimes, yes, even when they're genuinely a contractor.
Under the super guarantee law, an individual contractor counts as an employee for super if they're paid wholly or principally for their labour. In practice, the ATO looks at three things together:
- You pay them mainly for their labour and skills, not for materials, equipment or a result that includes significant other costs.
- They must do the work personally.
- They aren't paid to achieve a result.
If those apply, you must pay super guarantee for them at 12% of qualifying earnings for 2026–27, and since 1 July 2026 it must be paid under the Payday Super rules: each time you pay them, with the contribution reaching their fund within 7 business days. The labour rule doesn't apply where the contractor operates through a company, trust or partnership and you pay that entity.
Our guide to Payday Super explains the new timing, and missed super is dealt with on our payroll and Payday Super service page.
Watch out: A labour-only subcontractor on an hourly or daily rate, who has to turn up personally, is the classic case where super is owed even though everyone thinks of them as a contractor.
What is sham contracting?
Sham contracting is when an employer disguises an employment relationship as a contracting arrangement. The Fair Work Act prohibits:
- Misrepresenting employment as an independent contracting arrangement.
- Dismissing or threatening to dismiss an employee so they can be re-engaged as a contractor doing the same work.
- Making a knowingly false statement to persuade an employee to become a contractor.
Since 27 February 2024, the defence for misrepresentation has been tightened. An employer must now show that, when the representation was made, it reasonably believed the arrangement was a contract for services. Previously the test was whether the employer was reckless. "We didn't think about it" no longer helps. Civil penalties apply, and the Fair Work Ombudsman can pursue individuals involved, not just the business.
Signs an arrangement could be a sham
- The worker was an employee, and is now doing the same job as a "contractor".
- You told them to get an ABN as a condition of the job.
- They work set hours, at your premises, with your tools, under your supervision.
- They can't send anyone else to do the work.
- They work only for you, on an ongoing basis, and are paid by the hour.
- They wear your uniform and deal with your customers as part of your team.
None of these alone proves a sham. Several together should prompt a review.
How does payroll tax apply to contractors?
Every state and territory has contractor provisions in its payroll tax law, often called the relevant contract provisions. They treat payments to contractors as taxable wages unless an exemption applies, even when the contractor is genuinely independent at common law. This catches many businesses by surprise, because it sits outside both the Fair Work and ATO tests.
The common exemptions are broadly similar across states. In general terms they cover contracts where:
- the services are ancillary to supplying or using goods (for example, supply and install where the goods are the main thing);
- the contractor ordinarily provides that kind of service to the public generally;
- the services are of a type your business doesn't ordinarily need, or needs only for short periods in a year;
- the contractor engages others to do the work.
Each exemption has its own conditions, and some depend on a determination from the revenue office. Uber's dispute with Revenue NSW over payroll tax on payments to drivers has tested how far these provisions reach. A High Court decision on the payroll tax contractor provisions was pending at the time of writing. Platform and medical businesses should watch this closely.
Grouping, thresholds and rates differ by state; see our guide to payroll tax by state, or our state taxes service for a review.
Worked example: one worker, four answers
Hypothetical. General information, not advice on any real arrangement.
Say a Sydney fit-out company engages Jordan, a carpenter, on an hourly rate through Jordan's own ABN as a sole trader. Jordan works only for this company, on its sites, uses its larger power tools (bringing hand tools), works the hours the site supervisor sets, and can't send anyone else. This has gone on for two years. Jordan's written agreement is titled "Independent Contractor Agreement" and says Jordan controls how the work is done.
| Question | Likely answer | Why |
|---|---|---|
| Fair Work: employee? | Likely yes | The practical reality (set hours, supervision, no delegation, ongoing, hourly pay) outweighs the contract label |
| PAYG withholding: employee? | Arguable either way | The contract terms point to a contractor, but the inability to delegate and hourly pay point to employment |
| Super guarantee owed? | Likely yes | Paid principally for labour, must work personally, not paid for a result |
| NSW payroll tax on the payments? | Likely yes | Even as a contractor, payments are likely caught by the contractor provisions unless an exemption fits |
If the company's payroll is above its state's threshold, two years of payroll tax, super with charges, and possible award back pay could follow. The fix is usually straightforward going forward: either restructure the arrangement so it's genuinely independent, or employ Jordan properly. The past exposure is worth quantifying, and voluntary disclosure usually costs less than waiting to be found.
Decision guide: what should you do?
| If this describes the worker | What to do |
|---|---|
| Works set hours under your direction, can't delegate, paid by the hour, ongoing | Treat as an employee, or genuinely restructure. Get advice before you rely on a contract |
| Quotes per job, uses own equipment, can send others, works for many clients | Likely a genuine contractor. Document it, and still check payroll tax and super |
| Labour-only, hourly or daily rate, must work personally | Even if a contractor, pay super under the labour rule. Check payroll tax |
| Operates through their own company or trust | Super's labour rule doesn't apply. Check the Fair Work reality and payroll tax |
| Earns above the high income threshold and wants a contract-only Fair Work test | Consider the opt-out notice. It doesn't change tax, super or payroll tax |
| Was an employee and wants to "go contractor" for the same role | Be very careful. This is the core sham contracting scenario |
Mistakes we see
- Relying on the contract title. For Fair Work, reality wins.
- Assuming an ABN settles it.
- Forgetting super for labour-only contractors.
- Ignoring payroll tax contractor provisions once the business passes the threshold.
- Running one test and stopping. Fair Work, ATO, super, payroll tax and workers compensation are separate questions.
- Not reviewing as the relationship changes. A short project that becomes two years of full-time work changes the picture.
- Missing the taxable payments annual report in industries that must lodge it.
How BPAG helps
We review contractor arrangements as part of payroll and award compliance work. Our employment law agent works through the Fair Work questions, including the whole-of-relationship test and sham contracting rules, and our state taxes agent tests payments against your state's payroll tax contractor provisions. Our super guarantee charge agent quantifies any missed super under the current rules. A qualified accountant reviews every draft and talks you through the result.
Where an arrangement needs a new contract, a solicitor prepares it; we brief them and work alongside. See our employment and award compliance service, and if you're in building, our page for trades and construction businesses.
Frequently asked questions
Does having an ABN make someone a contractor?
No. An ABN is a registration, not a test of the relationship. A worker with an ABN can still be your employee if the substance of the arrangement looks like employment. Asking a new worker to get an ABN so you can treat them as a contractor is a classic sham contracting red flag.
Can a worker choose to be a contractor?
Mostly no. Neither side's preference decides it. The only exception is narrow: under the Fair Work Act, a contractor earning above the contractor high income threshold can give a notice opting out of the whole-of-relationship test, so the contract terms are looked at instead. That opt-out doesn't change their status for tax, super or payroll tax.
What penalties apply for treating an employee as a contractor?
Several, from different regulators: underpaid wages, leave and other entitlements under the award, the super guarantee charge with interest and penalties, unpaid PAYG withholding, payroll tax with interest and penalties, and workers compensation premiums. Fair Work civil penalties can also apply for sham contracting. The back pay alone can cover several years.
Are casual employees the same as contractors?
No. Casuals are employees. They're paid a casual loading instead of paid leave, but you withhold PAYG, pay super, include them in payroll tax wages and cover them for workers compensation. A casual arrangement and a contractor arrangement are completely different relationships.
Do I need to report payments to contractors to the ATO?
In some industries, yes. Businesses in building and construction, cleaning, courier and road freight, IT, security and some others must lodge a taxable payments annual report listing payments to contractors. Check the ATO's list of affected industries if you're unsure.
What is the personal services income regime?
It's a set of tax rules for the contractor's side. Where a contractor's income is mainly a reward for their personal skills or effort, they may not be able to claim some business deductions or split income through a company or trust unless they pass the results test or another personal services business test. It doesn't decide whether they're your employee.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.