Calling someone a contractor does not make them one. In Australia the classification is decided by the real nature of the working relationship, not the label on the invoice. And the rules changed recently in a way small businesses need to understand.

Why it matters so much

If a worker is really an employee but treated as a contractor, the business can be liable for unpaid superannuation, leave, PAYG withholding and award entitlements, sometimes stretching back years. It is one of the most expensive mistakes we see, because it compounds across several obligations at once. Getting it right from the start is far cheaper than unwinding it later.

What changed in 2024

From 26 August 2024, the Fair Work Act introduced a new test for who is an employee. Instead of looking mainly at the words in the contract, the law now looks at the real substance, practical reality and true nature of the whole relationship. In plain terms, what you actually do day to day matters more than what the contract calls the arrangement. This brought back the older, common-sense, multi-factor approach.

There is a narrow exception. A genuine contractor earning above the contractor high income threshold, set by regulation and around $175,000 when this began, can formally opt out of the new test in writing. For most small business arrangements, that exception will not apply.

What actually points to employment

No single factor decides it. The whole picture is weighed up. Signs that point toward employment include:

  • The business controls how, when and where the work is done.
  • The person is part of the business rather than running their own enterprise.
  • They cannot genuinely delegate or subcontract the work.
  • They are paid for time or attendance rather than for a result.
  • They use the business’s tools, systems and equipment.
  • The arrangement looks ongoing rather than project based.

An ABN, a written contract and an invoice are relevant, but they do not settle it on their own.

Two traps worth knowing

First, tax and super use their own tests. Even where the Fair Work definition might not apply, superannuation can still be owed to a contractor who is paid mainly for their personal labour. So the fact that someone has an ABN does not mean no super is payable.

Second, sham contracting, that is, dressing up an employment relationship as a contract to avoid entitlements, carries real penalties. It does not have to be deliberate to cause a serious problem.

Practical steps

  • Look at how each contractor arrangement works in practice, not just what the paperwork says.
  • Assume super may be payable for individual contractors doing mainly labour, unless you have checked otherwise.
  • Put a clear written agreement in place that reflects the real arrangement.
  • Review long-standing contractor relationships regularly. They drift, and a person who was clearly a contractor two years ago may not be one now.

If you engage contractors and you are not completely confident they would hold up to scrutiny, an independent review will tell you where you stand and what, if anything, to change, before it becomes a claim.