Employee or Independent Contractor? Understanding the Legal Difference

Whether a worker is an employee or an independent contractor depends on the real substance and practical reality of the working relationship, not just what the contract or an invoice calls them. Since 26 August 2024, section 15AA of the Fair Work Act 2009 (Cth) applies a “whole-of-relationship” test for employee and employer status under that Act, while a different test applies for tax and superannuation purposes. Getting the classification wrong can expose a business to unpaid entitlements, superannuation shortfalls, penalties and sham contracting claims. If you are unsure how a worker should be classified, get advice before signing or relying on a contract.

Jurisdiction

This article discusses the position under Commonwealth law, principally the Fair Work Act 2009 (Cth), the Independent Contractors Act 2006 (Cth) and the Superannuation Guarantee (Administration) Act 1992 (Cth), as they apply to businesses and workers in New South Wales, including Hornsby and the Upper North Shore. It does not cover the classification tests used in other States or Territories, or NSW workers compensation and payroll tax rules in detail, which are assessed separately and may produce a different outcome.

Why This Distinction Matters

Many businesses assume that calling a worker a “contractor”, having them issue invoices, or asking them to hold an ABN, is enough to make them a contractor at law. It is not. Courts, the Fair Work Ombudsman and the Australian Taxation Office (ATO) look past labels to the true nature of the relationship. Misclassifying an employee as a contractor can lead to claims for unpaid wages, leave and superannuation, sham contracting penalties, and payroll tax and workers compensation exposure.

If you are setting up a new working arrangement, reviewing an existing contract, or responding to a dispute about a worker’s status, you can call Caspian Legal on (02) 7264 3200 or contact us online to discuss your situation before you sign anything or take further action.

Key Terms Explained

The table below explains the main terms used in this area in plain English.

Term	What It Means
Employee	A person engaged under a contract of employment. Employees generally receive minimum wages, leave, superannuation and other statutory entitlements.
Independent contractor	A person or business engaged under a contract for services to produce a result, generally running their own business and bearing their own commercial risk.
Sham contracting	Where a business wrongly represents an employment relationship as an independent contracting arrangement, in breach of the Fair Work Act 2009 (Cth).
Whole-of-relationship test	The approach under section 15AA of the Fair Work Act, which looks at the real substance, practical reality and true nature of the relationship, including both the contract terms and how the work is actually performed.
Ordinary time earnings (OTE)	The earnings used to calculate an employer’s minimum superannuation guarantee contribution.
ABN	Australian Business Number. Holding an ABN does not, by itself, make a worker a contractor.

How the Law Determines Employee or Contractor Status

The test for whether someone is an employee or a contractor has changed more than once in recent years, and the correct test can also depend on which law you are applying it under.

The 2022 High Court Approach

In 2022, the High Court of Australia held in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 that, where the parties have a comprehensive written contract that is not a sham and has not been varied, the classification of the relationship is generally determined by the legal rights and obligations set out in that contract, rather than by how the parties later behaved in practice.

The Current Position Under the Fair Work Act (from 26 August 2024)

The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Cth) inserted a new section 15AA into the Fair Work Act 2009 (Cth), which commenced on 26 August 2024. For the purposes of the Fair Work Act, whether a person is an employee is now determined by ascertaining the real substance, practical reality and true nature of the relationship. This involves considering the totality of the relationship, including both the terms of the contract and how the contract is actually performed in practice, effectively restoring a broader, multi-factor approach for Fair Work Act purposes. Eligible high-income contractors may, in some circumstances, opt out of this test and retain contractor status under sections 15AB to 15AD of the Act.

Section 15AA applies only to the meaning of “employee” and “employer” under the Fair Work Act. It does not automatically apply to other laws, such as superannuation guarantee, PAYG withholding, payroll tax or workers compensation legislation, which have their own tests.

Factors Considered Under the Whole-of-Relationship Test

Factor	Points Toward Employee	Points Toward Contractor
Control	Business directs how, when and where work is done	Worker decides how the work is performed
Ability to delegate or subcontract	Worker must perform the work personally	Worker can genuinely delegate or subcontract to others
Integration	Worker is presented as part of the business	Worker operates a separate, identifiable business
Tools and equipment	Business provides most tools and equipment	Worker supplies and maintains their own tools
Financial risk	Worker bears little commercial risk	Worker bears real commercial risk and can profit or lose from the work
Basis of payment	Paid regular wages/salary for time worked	Paid to achieve a specified result or milestone
Leave and benefits	Receives paid leave and similar entitlements	No entitlement to paid leave

No single factor is decisive. The Fair Work Commission and courts weigh all of the relevant indicators together, alongside the terms of the contract, to reach an overall conclusion.

Different Tests Apply for Different Purposes

A worker’s status can genuinely differ depending on which law is being applied. This is a common source of confusion and risk for businesses.

Purpose	Governing Law	Test Applied
Fair Work Act rights (minimum wages, leave, unfair dismissal)	Fair Work Act 2009 (Cth), s 15AA	Whole-of-relationship test (from 26 August 2024)
Superannuation guarantee	Superannuation Guarantee (Administration) Act 1992 (Cth), s 12	Ordinary common law meaning of employee, plus an extended definition capturing contracts wholly or principally for a person’s labour
PAYG withholding and tax	Taxation Administration Act 1953 (Cth); ATO guidance	Ordinary meaning of employee at common law, assessed on the specific contract
Sham contracting	Fair Work Act 2009 (Cth), ss 357–359	Whether the true relationship is employment, regardless of how it is described

In practice, this means a worker could be treated as a contractor for one purpose and, at the same time, be deemed an employee for superannuation guarantee purposes if their contract is mainly for their personal labour. Businesses should not assume that being correct under one test means they are automatically correct under all of them.

Sham Contracting: What Businesses Must Avoid

Sections 357 to 359 of the Fair Work Act 2009 (Cth) prohibit a business from:

• Misrepresenting an employment relationship as an independent contracting arrangement (s 357);
• Dismissing, or threatening to dismiss, an employee in order to re-engage them to do the same or substantially the same work as a contractor (s 358); and
• Making a statement the business knows is false to persuade a worker to become a contractor (s 359).

A business has a defence to the misrepresentation provision if it can show it did not know, and was not reckless as to whether, the relationship was really one of employment. Contraventions can lead to civil penalties, which are indexed and can be substantial for a corporation, in addition to orders for back-payment of wages, leave and superannuation. Current penalty amounts can be checked on the Fair Work Ombudsman website.

Steps to Work Out a Worker’s Status

1. Look at the whole relationship, not just the label used in the contract or on invoices.
2. Identify who controls how, when and where the work is done, and whether the worker can genuinely delegate the work to someone else.
3. Check who bears the financial risk, and who supplies the tools, equipment and insurance needed for the work.
4. Confirm how the worker is paid — for time worked, or to achieve a defined result.
5. Apply the correct test for the purpose in question (Fair Work Act rights, superannuation, tax or sham contracting may each require separate consideration).
6. Document the assessment and keep records supporting the classification adopted.
7. Obtain legal advice before finalising a contract, particularly for long-term, high-value or high-risk arrangements.

Documents to Prepare Before Getting Advice

Having the following on hand will help us assess a worker’s status efficiently:

• The written contract or agreement (if any), including any variations;
• Recent invoices or pay records for the worker;
• Correspondence describing the working arrangement (emails, onboarding documents, position descriptions);
• Details of who supplies tools, equipment, materials or a vehicle;
• Information about whether the worker can delegate or subcontract the work; and
• Details of how and when the worker is paid.

What Not to Do

1. Do not rely on a worker having an ABN, or issuing invoices, as proof that they are a contractor.
2. Do not assume a written contract is enough on its own — the practical reality of the relationship also matters for many purposes.
3. Do not dismiss an employee and re-engage them to do the same work as a contractor without advice — this may breach section 358 of the Fair Work Act.
4. Do not use the same contract template for every worker without checking it reflects how that worker actually operates.
5. Do not ignore superannuation guarantee obligations for contractors paid mainly for their labour.
6. Do not delay addressing a classification issue once you become aware of it — unpaid entitlements and superannuation shortfalls can accrue, and time limits may apply to certain claims.

Frequently Asked Questions

Does having an ABN make someone a contractor?

No. An ABN is a tax registration, not a legal test. A worker with an ABN can still be found to be an employee if the real substance of the relationship is one of employment.

Can a worker be an employee for one purpose and a contractor for another?

Yes. Because different laws apply different tests, a worker’s status for Fair Work Act purposes is not always the same as their status for superannuation guarantee or tax purposes.

What happens if we get the classification wrong?

Depending on the circumstances, a business may face claims for unpaid wages and leave, superannuation guarantee shortfalls and charges, payroll tax exposure, and sham contracting penalties under the Fair Work Act.

Do we still need to pay superannuation to contractors?

Superannuation may still be payable if the contract is wholly or principally for the individual’s personal labour, even where the worker is genuinely a contractor for other purposes. This depends on the terms of the specific contract.

Can a contract just state that someone is a contractor?

A written contract is an important factor and, following the 2022 High Court decisions, remains highly relevant, but for Fair Work Act purposes the whole-of-relationship test introduced by section 15AA also looks at how the contract is performed in practice.

What is a sham contracting arrangement?

It is where a business misrepresents what is really an employment relationship as independent contracting, dismisses an employee to re-engage them as a contractor for the same work, or makes false statements to induce a worker to become a contractor, contrary to sections 357 to 359 of the Fair Work Act.

Can high-income contractors opt out of the new test?

In some circumstances, contractors earning above the relevant income threshold may give an opt-out notice so that section 15AA does not apply to their relationship. Whether this is available, and appropriate, depends on the individual arrangement.

Assisting Businesses in Hornsby and the Upper North Shore

Caspian Legal assists businesses and workers throughout Hornsby and the surrounding Upper North Shore area, including Waitara, Asquith, Wahroonga, Turramurra, Thornleigh, Pennant Hills, Normanhurst, Berowra and Mount Colah, with employment and contractor arrangements, workplace disputes and business structuring advice.

What Happens at Your First Consultation

At an initial consultation, we review the contract or working arrangement in question, discuss the relevant facts and identify which legal tests apply to your situation. We then explain your options in plain English and discuss practical next steps, such as amending a contract, correcting past classification issues, or responding to a claim.

Speak With Caspian Legal

Worker classification issues can carry significant financial and legal risk for businesses, and significant consequences for workers who may be missing out on entitlements. Caspian Legal can review your contracts and working arrangements and explain your options. Contact Caspian Legal on (02) 7264 3200, visit us at 22–28 Edgeworth David Avenue, Hornsby NSW 2077, or get in touch online to arrange a consultation.