"They've got an ABN, they invoice me, so they're a contractor." It is the most common sentence we hear from employers — and the ATO rejects every part of it. Whether a worker is an employee or an independent contractor decides who withholds tax, who pays super, whether payroll tax applies and whether Fair Work can fine you.
The test after the 2022 High Court decisions
In CFMMEU v Personnel Contracting and ZG Operations v Jamsek the High Court held that the relationship between a worker and a business is defined by the contract between them — written, verbal, or implied from conduct — rather than by how the arrangement played out in practice. The ATO's guidance follows that approach. The question is whether the worker is contractually required to serve in your business as its representative, or is providing services to your business in furtherance of their own.
The old "multifactorial test" is gone as a test, but its indicia still matter as a way of reading the contract. The ATO's table contrasts the two outcomes on:
- Control — does your business have the right to decide how, where and when the work is done, or can the worker choose subject to reasonable direction?
- Integration — is the worker required to perform work as a representative of your business, or to further their own?
- Mode of remuneration — paid for time, per item or on commission (employee-like), or for a result at a fixed fee (contractor-like)?
- Ability to delegate — a genuine, exercisable right to subcontract points to a contractor; a clause that is a sham does not.
- Tools and equipment — who supplies the substantial assets, and whether the worker is reimbursed for them.
- Commercial risk — who pays to fix defective work.
- Goodwill — whose business benefits from the work.
No single factor decides it. Some workers are always employees: apprentices, trainees, labourers and trades assistants. And if you engage a company, trust or partnership, the relationship is contracting — the people who turn up are that entity's workers, not yours.
The ATO publishes an employee or independent contractor decision tool, reached from its employee or independent contractor page. Keep the result with the contract.
Things that make no difference
The ATO's own list of myths covers most of what we hear: the worker has an ABN; the worker has a registered business name; the worker invoices you; the contract calls them a contractor; the job is short or irregular; everyone else in the industry does it this way; the worker asked to be a contractor; the worker has specialist qualifications; the "80/20 rule" (which is about personal services income, not classification). None of these turn employment into contracting, and agreeing to a worker's request to be a contractor leaves you, not them, exposed.
Super for contractors paid mainly for labour
This is where even careful businesses get caught. An independent contractor is treated as an employee for super guarantee purposes if you pay them under a contract that is wholly or principally for their labour — more than half the contract's value is labour — for their personal skills rather than a specified result, and the work can't be delegated. It does not matter that they have an ABN. The ATO's own example is a freelance administrator paid by the hour who must do the work personally: super is payable. A painting business engaged to deliver a finished job: it isn't.
Super must go to the worker's fund, and you must offer choice of fund within 28 days of their start. Paying an extra amount in cash "in lieu of super" does not discharge the obligation. From 01-07-2026 contributions are calculated on the contractor's qualifying earnings — all payments for their labour, including overtime, but excluding materials, equipment and GST. Where a contract bundles labour and materials, itemise them, or use a reasonable market value split and keep the working.
Payday Super from 1 July 2026
Payday Super applies to contractors who are employees for super purposes just as it does to employees. Super guarantee, still 12%, must be received by the fund within seven business days of each payday rather than 28 days after quarter end. Qualifying earnings and super liability are both reported through Single Touch Payroll, and the Small Business Superannuation Clearing House is closed. Late payments trigger an ATO-assessed super guarantee charge with daily-compounding interest, plus penalties of 25% or 50% of the unpaid charge (our payroll and STP service handles this).
PAYG withholding
For employees you withhold tax from wages and report it through STP. For contractors you generally don't — unless they fail to quote an ABN (in which case you withhold at the top rate) or they ask for a voluntary withholding agreement. Misclassify an employee and you have failed to withhold, which carries its own penalty.
Payroll tax
In Victoria the State Revenue Office treats payments to contractors as wages where the contractor provides services exclusively or primarily to one principal, unless a specific exclusion in the contractor provisions applies — and this is tested regardless of whether the contractor trades as a company, trust or sole trader. Contractor payments can push you over a state threshold, and the rules differ in each state and territory.
Sham contracting under the Fair Work Act
It is unlawful under the Fair Work Act 2009 to represent to a worker that they are an independent contractor when you don't reasonably believe it, to say something false to persuade an employee to become a contractor for the same work, or to dismiss an employee in order to re-engage them as a contractor. The Fair Work Ombudsman lists maximum court penalties per contravention of $21,840 for individuals, $109,200 for businesses with fewer than 15 employees and $546,000 for larger businesses, on top of back-paid entitlements (see fairwork.gov.au). Employment-law questions belong with a lawyer.
What getting it wrong costs
The ATO's own list for a misclassified employee: a PAYG withholding penalty for the tax you didn't withhold; the super guarantee charge, which is more than the super itself because it adds nominal interest and an administration fee, and is not deductible; and further super penalties on top of that. Add payroll tax reassessment, Fair Work penalties and the fees to unwind several years of it — often prompted by a tip-off from a former worker.
The TPAR link
If you are in building and construction, cleaning, courier or road freight, IT or security and you pay genuine contractors, you also report those payments each August in a Taxable payments annual report, which the ATO matches to the contractors' returns.
What SMT does
We review the contract and the actual working arrangement before a worker starts, document the classification and the super position, set up payroll and STP for anyone who is an employee for tax or super purposes, calculate super on contractors' labour-only payments, and flag payroll tax exposure. For building and trade clients, the same review feeds the TPAR. If an old arrangement looks wrong, we quantify the exposure and manage a voluntary disclosure.
Sources
- ATO — Difference between employees and independent contractors
- ATO — Myths and facts
- ATO — Employees incorrectly treated as independent contractors
- ATO — Your tax and super obligations
- ATO — Super for independent contractors
- ATO — About Payday Super
- ATO — Payments you need to withhold from
- State Revenue Office Victoria — Payroll tax: contractors
- Fair Work Ombudsman — Sham contracting
Frequently asked
How does the ATO decide contractor vs employee?
By looking at the legal rights and obligations in the contract between you and the worker — written, verbal or implied from conduct — and asking whether the worker serves in your business or runs their own. The label in the contract makes no difference. The ATO weighs control, integration, how the worker is paid, the right to delegate, who supplies tools, who bears commercial risk and who gets the goodwill.
What is the contractor vs employee test?
Since the High Court's 2022 decisions there is no multi-factor checklist; the question is what the contract says. The old indicia are still used, but only to interpret the contractual terms, not day-to-day practice. Apprentices, trainees, labourers and trades assistants are always employees, and a company, trust or partnership you engage is always a contractor.
Do I pay superannuation for a contractor vs employee?
Employees are paid super. Contractors are too if you pay them under a contract that is wholly or principally for their labour, for their personal skills, and they can't delegate the work — an ABN doesn't change this. You must pay into their super fund; paying extra cash instead does not count. From 1 July 2026 super on contractors' labour includes overtime and must reach the fund within seven business days of payday.
Is there an employee or contractor calculator?
The ATO publishes an employee or independent contractor decision tool for tax and super purposes, reached from its employee or independent contractor page. It is a guide, not a ruling — if the answer is unclear or the arrangement is unusual, get advice before the worker starts rather than after a dispute.
What is sham contracting?
Telling or representing to a worker that they are an independent contractor when they are actually an employee, where the business does not reasonably believe the worker is a contractor. It is unlawful under the Fair Work Act 2009. Fair Work lists maximum court penalties per contravention of $21,840 for individuals, $109,200 for businesses with fewer than 15 employees and $546,000 for larger businesses.
Does a contractor with an ABN still count as an employee?
They can. The ATO is explicit that holding an ABN, having a registered business name, submitting invoices or signing a contract that says 'independent contractor' does not make a worker a contractor if the working arrangement is employment. Classification follows the substance of the contract, not the paperwork around it.