What changed in 2024
The Fair Work Act now has a written definition of employment. From 26 August 2024, a business covered by the national system through the corporations power looks at the real substance, practical reality and true nature of the relationship. It must consider all parts of that relationship, including the terms of the contract and how the contract works in practice.
Before that date, the test looked mainly at the written contract when the relationship began. That older test is still used for work done before 26 August 2024. It also applies to some businesses, such as sole traders and partnerships in states that referred their powers to the Commonwealth. A business with "Pty Ltd" or "Ltd" in its name is usually a constitutional corporation, but that is only a rule of thumb.
The factors that matter
The Fair Work Ombudsman lists several factors. None of them decides the question alone.
- Control: who decides the hours, the place and the way the work is done.
- Money and risk: who carries the cost of poor work, and whether the worker can make a profit or a loss on each job.
- Tools: whether the worker brings their own equipment or uses yours.
- Delegation: whether the worker can send someone else or hire a helper.
- Hours: fixed rosters point to employment, while the worker setting their own schedule points to contracting.
- Ongoing work: whether both sides expect the work to continue with no end date.
The same guidance makes two points that surprise people. Holding an ABN or sending invoices does not make someone a contractor. And doing the same kind of work as your staff does not make someone an employee. The facts of each case decide it.
Why the ATO answer can differ
Tax and super have their own rules. The Fair Work Ombudsman says the new definition does not change the meaning of employee in other laws, such as tax, superannuation and workers compensation.
The Australian Taxation Office says you must classify the worker for tax and super purposes, and you need to get it right. Its guidance looks at whether the worker is serving in your business or providing services to further their own business. It reviews the legal rights and obligations in the contract, and any label you use will not decide the matter. It also says apprentices and trainees are always employees for tax and super purposes.
Super can apply even to a true contractor. The ATO notes that a person working under a contract that is wholly or principally for their labour can be treated as an employee for super purposes.
What to review in the contract
Read the contract as if a stranger had to decide from it alone. Then compare it with what really happens day to day.
- Does it describe a result or project, or does it just buy the worker's time?
- Can the worker use a substitute or subcontract part of the job?
- Who owns the tools, the vehicle and the insurance?
- Is the worker free to take other clients, and do they?
- Does the worker bear the cost of fixing their own mistakes?
- Are you directing how the work is done, or only what must be delivered?
Keep notes on how the arrangement runs. Under the whole of relationship test, practice counts as well as paper. A tidy contract will not help if daily life looks like employment.
Risks if you get it wrong
Sham contracting means presenting an employment arrangement as a contracting one. Since 27 February 2024, an employer defending such a claim must prove it reasonably believed the worker was a contractor when it made the statement. The older defence only asked whether the employer was reckless.
Contractors also gained new options. From 26 August 2024, a contractor can ask the Fair Work Commission to review unfair terms in a services contract, where the work has a constitutional connection and the contractor earns under the high income threshold. A contractor above that threshold can also opt out of the whole of relationship test.
The ATO adds that a wrong call on tax and super can bring penalties and charges, so it pays to classify the worker with care.
A simple way to decide
Write down the answer to each factor before you sign. If most point to control and a fixed routine, plan for an employee. If most point to independence, own tools and real business risk, a contractor may fit. If the answer is unclear, get legal advice. The Fair Work Ombudsman says it cannot decide whether a particular worker is a contractor or an employee, and that some cases need a court.
This article is general information, not advice. For a real worker, ask a registered tax agent or an employment lawyer.