Guide · Updated 17 August 2026
Contractor or employee? The test that decides
Why an ABN and an invoice prove nothing, which factors actually decide it, and what a wrong answer costs — with interest.
How do you tell a contractor from an employee?
By the substance of the whole arrangement, not the label. Courts and the ATO weigh the terms of the contract and how the relationship operates: whether the worker is paid for a result or for time; whether they can delegate or subcontract the work; who supplies tools and equipment; who bears commercial risk and liability for defects; and the degree of control over how, when and where work is done. An ABN, an invoice, or a written label of "contractor" does not settle it. Critically, even genuine contractors attract superannuation guarantee where the contract is wholly or principally for their labour.
- Substance over labels — ABNs prove nothing
- Super applies to labour-only contracts
- Back-pay, PAYG, super, interest and penalties
- Directors personally liable for unpaid super
The factors that carry weight
| Factor | Points to employee | Points to contractor |
|---|---|---|
| Basis of payment | Paid for time worked | Paid for a specified result |
| Delegation | Must do the work personally | Can subcontract or delegate |
| Tools and equipment | Supplied by the business | Supplies their own significant assets |
| Commercial risk | Business bears it | Worker bears it, fixes defects at own cost |
| Control | Business directs how work is done | Worker decides method |
| Integration | Presents as part of the business | Operates their own business |
No single factor decides it. A worker with an ABN, their own tools and multiple clients who is nonetheless told exactly how and when to work may still be an employee.
What a wrong answer costs
Retrospectively: PAYG withholding that should have been withheld, superannuation guarantee plus the non-deductible SG charge and interest, leave entitlements under the Fair Work Act, potentially payroll tax, and penalties. It accrues per worker per quarter, so a misclassification across four workers over three years becomes a very large number quietly.
Directors can also be made personally liable for unpaid PAYG and super through a director penalty notice, which removes the protection people assume a company provides.
Getting it right, and fixing it if not
Review the arrangement against the factors, write the contract to match reality (not the reverse), and check the superannuation question separately — labour-only contracts attract SG even when the classification is genuinely contractor. Where a worker is really an employee, correct it prospectively and quantify the historical exposure so you can decide how to handle it.
Voluntary correction is treated far better than a worker complaint or an ATO review. We quantify exposure and manage the disclosure — see payroll services and ATO audit support.
Frequently asked questions
If they have an ABN, aren't they a contractor?
No. An ABN is a registration, not a classification. Plenty of workers with ABNs are employees at law, and the consequences fall on the business paying them.
Do I pay super to a genuine contractor?
Often yes — where the contract is wholly or principally for their labour. Contracting through the worker's own company generally removes the obligation. This is the most commonly missed liability in trades, cleaning and creative services.
Can we just sign an agreement saying they're a contractor?
A written agreement matters — recent High Court decisions place real weight on the terms of a comprehensive written contract — but it must reflect how the relationship actually operates. A document that contradicts the practice won't save you.
What about labour hire and gig platforms?
Labour hire adds a third party and its own obligations, and the treatment depends on the contractual chain. Platform work is an evolving area with new regulation. Get arrangements reviewed rather than assuming the platform has handled it.
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