Contractor vs Employee

Many contractors are now employees – under the new rules

You call yourself an independent contractor. Your business operates out of a company. However, the new rules mean that you are still an employee. The distinction between contractor and employee is now murky.

What is an ‘employee?’ What is an ‘independent contractor?’

The desire for flexibility in the workforce muddies the waters. The government’s classification of an independent contractor as an employee is detrimental to you. This is because employer obligations are lower for an independent contractor.

Am I an employee?

Australia has long had the traditional master–servant and control test. This is used to prove that you are an employee.

However, the courts now consider a multifaceted approach. This is to determine whether you are an employee or an independent contractor. Consider the on-call interpreters in Hollis v Vabu Pty Ltd [2001] HCA 44.

Example of a contractor now an employee – test yourself with John and Frank

John runs a busy construction company. He wins a big job and needs an experienced site foreman, fast. He finds the perfect person, Frank. To avoid the hassle of payroll tax, super, and leave entitlements, John tells him, “I can only take you on as a contractor. Go and register an ABN and a company, then send me an invoice each week.”

Frank agrees. He sets up ‘Frank’s Foreman Services Pty Ltd’ and gets an Australian Business Number.

On Monday, John gives Frank a ute with the company logo, a branded hard hat, and a list of tasks. He tells Frank to be on-site from 7 am to 4 pm, Monday to Friday, and to manage the team of carpenters, who are all employees. Frank works exclusively on John’s project for the next year.

The project ends. John says, “Thanks for your help, mate. Job’s done.”

Two weeks later, John is served with an unfair dismissal claim from Frank, along with a demand for $88,000 in unpaid annual leave and superannuation.

Is Frank an Independent Contractor or an Employee?

If Frank is an employee, then John faces these additional burdens:

• Workers’ Compensation: John failed to have a policy covering Frank, exposing him to huge fines and liability for any injuries.
• PAYG Tax: John failed to withhold tax for the Australian Taxation Office and may now be liable for it himself, plus penalties.
• Superannuation: John owes a year’s worth of super, plus significant ATO penalties for late payment.
• Unfair Dismissal: Frank now has the right to challenge the termination of his employment.
• Paid Leave: John may have to pay out for annual leave and sick leave.

Let us break that down.

The ‘Real Substance’ Test: What the Law Says about Frank

John’s mistake was thinking that an ABN and a company structure were enough. Under section 15AA of the Fair Work Act 2009 (Cth), the courts must look at the “real substance” and “practical reality” of the total relationship.

A Legal Consolidated Independent Contractor Agreement would have saved John. Our legally-drafted agreement is designed to address this very issue. The built-in legal logic and warnings would have forced John to confront the fact that he was exercising a high degree of control, integrating Frank into his business, and not allowing for delegation. This process protects you from making the same costly mistake.

To understand John’s situation, we apply the “multifactorial test.”

Employee vs Contractor: The Key Legal Factors as to what Frank is

This checklist shows what a court would examine in John and Frank’s relationship.

Key Factor	Points Towards an Employee (Frank’s Reality)	Points Towards a True Contractor
Control	John controlled Frank’s hours, location, and the manner in which he performed his work.	They have a high degree of control over their own work, focusing on the contracted result.
Delegation	Frank had to perform the duties personally. He could not send someone else.	Has the right to delegate or subcontract the work to another person.
Equipment & Tools	John provided the significant equipment (the company ute).	Provides and pays for their own significant tools and equipment.
Commercial Risk	Frank was paid a set rate. He took no financial risk for the project’s success.	Bears the financial risk, with the chance to make a profit or a loss on the work.
Business Integration	Frank appeared as part of John’s business (logo on ute, managing employees).	Operates their own independent business and is free to work for other clients.

This test, established in landmark cases like Stevens v Brodribb Sawmill Pty Ltd (1986) 160 CLR 16, looks at the whole picture. The evidence overwhelmingly shows Frank was serving in John’s business, not running his own.

Sham Contracting: When a Mistake Becomes a Crime

There is a difference between John’s situation—a costly mistake—and a deliberate deception.

Imagine if John knew Frank was an employee but pressured him into the contracting arrangement specifically to avoid paying superannuation. This is sham contracting.

It is a serious breach of the Fair Work Act 2009 (Cth), which prohibits this conduct under section 357. It occurs when a business knowingly or recklessly misrepresents an employment relationship.

For serious contraventions, both the business and the director, if a company, face substantial monetary penalties

This is not a theoretical risk. In the real case of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (2015) 228 FCR 346, a hotel was heavily penalised for deliberately misclassifying housekeepers as contractors to cut costs.

A Legal Consolidated Independent Contractor Agreement is your best defence. It demonstrates that you have carefully considered the legal factors and have not been reckless, helping to protect you from the most severe penalties.

How the Fair Work Commission Decides if an employee or a contractor

The story of John and Frank is a common example. However, let us examine how the Fair Work Commission applies these factors in its decided cases. These examples show how minor details in the work arrangement can lead to completely different outcomes.

1. Dickerson v Kagura Games: The Game Tester Who Was an Employee

In the case of Tabitha Dickerson v Kagura Games [2025] FWC 2219, Tabitha was engaged to test computer games. Her contract clearly labelled her an “independent contractor.” When the company terminated her engagement, she lodged an unfair dismissal claim.

The company argued she was a contractor and had no right to do so.

The Fair Work Commission looked beyond the contract’s label. It examined the practical reality of the relationship. It found the company, Kagura Games, exercised a high degree of control.

• Tabitha had to submit weekly reports.
• Tabitha had to report to a specific supervisor.
• Tabitha was required to assist colleagues.
• Crucially, Tabitha could not delegate or subcontract her work.

The Fair Work Commission determined that, despite the contract’s wording, the level of control indicated an employment relationship. Tabitha was deemed an employee and was allowed to proceed with her unfair dismissal claim.

This case highlights a critical risk. A simple contract template is not enough. A Legal Consolidated Independent Contractor Agreement forces both parties to clearly define the rules around control, supervision, and delegation. This process creates a stronger, more defensible arrangement from the start.

2. Elezaj v Baldwin Care Group: The Home Carer Who Was a True Contractor

Conversely, in the case concerning Ms Harmane Elezaj v Baldwin Care Group [2025] FWC 2159, the outcome was different. Ms Elezaj, a home carer, was engaged through a third-party platform to provide services to two of Baldwin Living’s clients. When the clients ended the arrangement, Ms Elezaj claimed she was an employee of Baldwin Living.

The Fair Work Commission again applied the multifactorial test. It found:

• Baldwin Living had only limited involvement and control over Ms Elezaj work.
• The clients set her hours and directed her duties.
• The clients, not the company, were the ones who terminated her services.
• Ms Elezaj operated under her own Australian Business Number and invoiced for her work.

The Fair Work Commission found that Ms Elezaj was operating her own business. She was a genuine independent contractor and was not entitled to bring an unfair dismissal claim.

This shows what a true contractor relationship looks like. Building a Legal Consolidated Independent Contractor Agreement helps formalise this exact structure. It provides a clear record that the worker operates their own business, controls their work, and is not integrated into your business, which is powerful evidence if the relationship is ever questioned.

Comparing the Dickerson and Elezaj cases

This table breaks down the critical facts from the Dickerson and Elezaj cases, showing why the Fair Work Commission reached different conclusions.

Four questions before you build an Independent Contractors Agreement

Business owners must ask these questions:

1. Do I Have to Pay Superannuation to an Independent Contractor?

This is a critical legal trap. The definition of an ’employee’ for superannuation purposes is much broader than for workplace law.

Under the Superannuation Guarantee (Administration) Act 1992 (Cth), you must pay superannuation to a contractor if the contract is “wholly or principally for their labour”. This means if you are paying the person primarily for their skills and hours, rather than a final result, the Australian Taxation Office will likely deem them an employee for superannuation purposes.

This is true even if the person has an Australian Business Number and is a genuine contractor for all other purposes.

A Legal Consolidated Independent Contractor Agreement contains specific clauses addressing superannuation. Our document forces you to address this issue to ensure it is not overlooked.

2. Does an Australian Business Number Make Someone a Contractor?

No. This is a common and dangerous myth.

An Australian Business Number (ABN) is a necessary requirement for a person to be a contractor. However, it is not the deciding factor. It is just one piece of evidence in the multifactorial test.

The Fair Work Commission and the Australian Taxation Office will always look at the full list of legal factors. As the story of John and Frank shows, having an ABN provides no protection if the reality of the relationship is one of employment.

3. Who is Responsible for Insurance for a Contractor?

A genuine independent contractor is responsible for their own insurance. This includes public liability insurance, professional indemnity insurance, and income protection. Employees, by contrast, are covered by the employer’s workers’ compensation insurance policy.

Requiring a contractor to provide proof of their own insurance is a key indicator that they are running their own independent business.

Our Independent Contractor Agreement includes a requirement for the contractor to provide certificates of currency for their insurance policies. This strengthens the legal standing of the relationship and protects your business.

4. Can an Independent Contractor Work Exclusively for Me?

Yes, but it is a significant risk factor. A core feature of running an independent business is the freedom to work for multiple clients.

If a contractor works exclusively for you for a long period, it weakens the argument that they are independent. It starts to look more like they are simply integrated into your business. While it is not prohibited, it is a red flag that the Fair Work Commission will scrutinise closely in a dispute.

Australian Tax Office vs Fair Work: a separate test to be a contractor

It is a complex world for a business owner. You must consider the contractor relationship for unfair dismissal claims under the Fair Work Act 2009 (Cth). But the Australian Taxation Office has its own set of rules for withholding PAYG and superannuation. Do not be caught between the two.

Consider this scenario. Mary runs a successful accounting firm. She requires a specialist to handle complex self-managed super fund audits for a period of six months. She engages Rolf, a highly experienced auditor who has his own company and professional indemnity insurance.

Mary provides Rolf with a desk and a login to the firm’s system. She gives him a list of client files to audit, but does not direct how he should conduct the audits; she trusts his professional expertise. Rolf is free to work from home two days a week and sets his own hours, as long as he meets the deadlines. He invoices Mary’s firm monthly from his company account.

Is Rolf a contractor or an employee according to the Australian Taxation Office?

The ATO uses a similar multifactorial test to the Fair Work Commission. The ATO also looks at the whole picture.

In this case, the Australian Taxation Office would likely agree that Rolf is a contractor. The key factors are:

• Control: Mary has little control over how Rolf performs his expert work.
• Independence: Rolf has his own company, insurance, and invoices as a result. He is not presented as an employee of the firm.
• Expertise: He is engaged for a specialist skill that is not a core part of Mary’s day-to-day business.
• Contractor Agreement: The Legal Consolidated Independent Contractor sets out all the legalities of a contractor

The evidence points to Rolf running his own independent business. Therefore, Mary is not required to withhold Pay-As-You-Go tax or pay superannuation.

This is the type of clear, defensible relationship that a Legal Consolidated Independent Contractor Agreement is designed to create. It documents these exact factors—the high level of control the contractor has, their responsibility for their own business, and the basis for their payment—providing clear evidence to the Australian Taxation Office.

Am I a contractor or an employee?

An independent contractor runs their own business. The Principal may hire the labour of a contractor. But the Principal has little direction or control over how that service is supplied.

For example, the electrician comes to your home. You tell him what you want done. But you do not tell him what to wear or how to do his job.

Consider ATO ruling TR 2005/16. It is on ‘Income tax: Pay As You Go – withholding from payments to employees’:

The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

A small business is more likely to have an employee rather than a contractor

Take John. He is a partner in a large Accounting house. He assists a single client for 12 weeks. John, or rather his Accounting house, is an independent contractor. The client is the Principal.

But what about where John is a sole proprietor? He does the same work for the client for 12 weeks. It is now likely that John is the client’s employee. What a mess.

“Contract of Service” vs “Contract for Service”

• An employee relationship is a “contract of service.” An employee provides services exclusively at the employer’s discretion.
• A contractor relationship, on the other hand, is a “contract for services.” Contractors work to produce a service or product for the benefit of the Principal.

That seems simple. But the government refuses to define either “independent contractor” or “employee.” The result?  Whether a person is an employee is a question of fact. Therefore, Courts look at previous cases to work out whether you are a contractor or an employee.

Traditionally, the High Court used the “control test.” Greater control by the boss implies an employee relationship. In contrast, an employer exercising little control suggests a contractor relationship. However, the test has changed.

The control test is now only one factor. Courts look to four other key factors of the relationship between the boss and the worker. This puts the 1949 case of Humberstone v Northern Timber Mills back in vogue.

In this case, they were:

1. Payment-payment on a regular basis, as opposed to payment for a particular service, indicates that it is an employee relationship.
2. Delegation-independent contractors can delegate work to others. However, an employee does the job personally.
3. Commercial risks-contractors carry their own insurance. They bear the cost of defects in their work. An employee on the other hand usually bears no risk for errors.
4. Responsibility for equipment–independent contractors pay for their equipment. In contrast, employees are supplied with equipment. Or they are reimbursed for expenses.

Does this new approach help?

The new approach blurs the distinction between independent contractor and employee.

Ask yourself: Are you operating your own business? Or are you working for an employer?

Contractor vs Employee? Found to be an independent contractor

A truck falls, a man dies – Humberstone v Northern Timber Mills [1949] HCA 49 389.

Mr Humberstone’s truck fell on him, killing him instantly. Mr Humberstone was an independent contractor, working for Northern Timber Mills. His wife thought otherwise. She believed her husband was an employee. If true, this entitled her to workers’ compensation.

The battle was pursued all the way to the High Court.

Mr Humberstone used his own vehicle. He worked the same hours each day. Payment was made weekly based on weight per mileage, as opposed to time spent. On the side of his truck, Mr Humberstone painted: “Humberstone Carriers”. Northern Timber Mills had no control over how Humberstone carried out his work.

The High Court rejected Mrs Humberstone’s claim. Mr Humberstone was an independent contractor. Mrs Humberstone couldn’t get her hands on Northern Timber Mills’ workers’ compensation.

Contractor vs Employee? Found to be an employee

Illiterate migrant tricked into signing an independent contractor’s agreement – Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 45.

Ms Roden, an illiterate migrant, worked happily as a housekeeper for the company, Quest. One day, Quest prepared a contract for Ms Roden to “get around employment laws”. Ms Roden was an employee, but the contract expressly stated that Ms Roden was an independent contractor. The High Court held that Quest’s actions were a sham that contravened the Fair Work Act:

The High Court stated, “Parties cannot create something which has every feature of a rooster, but call it a duck.” Just because a contract states an individual is an independent contractor does not mean that they are an independent contractor.

Contractor vs Employee? Five independent insurance agents are now employees – and get $500,000 to boot

In ACE Insurance v Trifunovski [2013] FCAFC 3, five insurance agents sold insurance on behalf of the Combined Insurance Company of Australia. There was a poorly drafted independent contractor agreement (prepared by a website that was pretending to be a law firm) that explicitly stated the agents were ‘independent contractors’. Two of those contracts were with the agent’s company – rather than with the agents individually.

The insurance agents were only allowed to work in set geographical locations. They had to report to the Regional Manager. The Regional Manager was an employee of the insurance company. The agents received no income or retainer. They were rewarded exclusively on commission. (This breaches employment law – if they are employees – because while employees can get commission, they must, at least, get the minimum wage or Award rate.)

The Trifunovski court stated:

1. Combined Insurance had an ongoing and intensive training programme that the agents had to partake in
2. Their duties were ‘carried out through the personal effort of the individual agent and only by them’
3. The agents were not allowed to employ anyone else to sell Combined Insurance’s insurance on their behalf
4. The agents were unable to delegate their work
5. The insurance company was significantly involved in the agents’ day-to-day operations – the old ‘control’ test is still there, but less important
6. The agents had ‘no real independence of action or true independence of organisation’
7. The poorly drafted contractor agreement was a sham, hiding an employment relationship

The Trifunovski Court, however, failed to note the agents:

1. operated with their own office, car and other work expenses
2. kept their own hours of work
3. carried the profit and loss of their ‘business’, being the sale of insurance

Nevertheless, the Court held the agents were employees of the Combined Insurance Company of Australia. Therefore, the company became responsible for the retrospective payment of:

1. annual leave
2. sick leave
3. long service leave

The Courts didn’t seem to know about compulsory superannuation; otherwise, the five wise insurance agents would have got superannuation, as well, compliments of their ’employer’.

Legal Consolidated Barristers & Solicitors’ Independent Contractors Agreement is superior in that our contracts include:

• The ‘work’ referred to allows the contractor to sub-contract, subject to approval
• The principal only has control of the work done, the time limits and the cost involved – but not how the work is carried out
• The contractor provides their own plant or equipment
• The contractor is paid on results and not merely for the time spent working

The High Court moves back to ‘agreement’
Workpac v Rossato

Consider Workpac v Rossato & Ors [2021] HCA 23. In this case, the High Court carefully considered the employment contract between Workpac and Mr Rossato. The result? Mr Rossato is a casual employee.

He, therefore, does not get leave entitlements.

The High Court in Workpac v Rossato states:

57. A court can determine the character of a legal relationship between the parties only by reference to the legal rights and obligations which constitute that relationship. The search for the existence or otherwise of a “firm advance commitment” must be for enforceable terms, and not unenforceable expectations or understandings that might be said to reflect the manner in which the parties performed their agreement. To the extent that Bromberg J expressed support for the notion that the characterisation exercise should have regard to the entirety of the employment relationship, his Honour erred.

62. To insist upon binding contractual promises as reliable indicators of the true character of the employment relationship is to recognise that it is the function of the courts to enforce legal obligations, not to act as an industrial arbiter whose function is to synthesise a new concord out of industrial differences. …
…
101. … the present case is concerned with the character of an employment relationship, a question the resolution of which has no significance for the rights of persons who are not privy to the relationship. The analysis in Hollis v Vabu affords no assistance, even by analogy, in the resolution of a question as to the character of an employment relationship, where there is no reason to doubt that the terms of that relationship are committed comprehensively to the written agreements by which the parties have agreed to be bound.

The decision in Workpac v Rossato places greater emphasis back on the Employment Contract. It did not follow the multi-factorial test applied in Hollis v Vabu.

Similarly, the Independent Contractor’s agreement may now provide a stronger indication of whether a person is an employee or a contractor.

Principals may still have to withhold Pay As You Go (PAYG) for their contractors

Employers hold back Pay As You Go (PAYG). This is for their employees. The rationale is that the employee cannot manage their budget effectively. The employee spends all the money he gets. When he gets his tax bill, he has no money to pay the tax!

Therefore, the ATO requires the employer to withhold PAYG. And send that money to the ATO. But contractors are not employees. Nevertheless, some principals are still needed to hold back PAYG for payments to contractors.

The PAYG withholding rules are outlined in the Taxation Administration Act 1953 (Cth), Schedule 1, Parts 2-5 (sections 10-1 to 20-80). Section 12-35 states:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

TR 2005/16 states that the term ‘employee’ has an ordinary meaning. However, for independent contractors, PAYG withholding does not occur. This shows the distinction between independent contractors and employees. There are tests to decide who is an employee and who is a ‘true’ independent contractor. The ATO in TR 2005/16 states:

Whatever the facts of each particular case may be, there is no single feature which is determinative of the contractual relationship; the totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or independent contractor.

The ATO is quick to argue that everyone is an employee, rather than an independent contractor. This is if the contractor is:

• paid for their personal labour
• perform the work personally
• are paid by reference to hours worked

A Legal Consolidated Independent Contractors agreement helps. However, the question is often decided upon using a multi-factorial approach. This is as set out in Hollis v Vabu and On Call.

Superannuation guarantee: ‘contract plumber’ also an ’employee’

– Virdis Family Trust t/a Rickard Heating v Fed Commission of Tax [2022] AATA 3

The court held that a plumber is an ’employee’. This is under the extended meaning of that term in s 12(3)  Superannuation Guarantee (Administration) Act 1992 (SGAA). This is for a person working under a contract wholly or principally for labour.

Employers have to pay superannuation for their employees. But what do ‘Employers’ and ‘Employees’ mean? Can a ‘contractor’ be an ’employee’ as well? This is for the compulsory super.

The question about whether a Superannuation Guarantee Charge should be imposed requires a determination about whether the business is for Mr Pirie, an ‘employer’. And whether Mr Pirie is an ‘employee’ of the business. This is having regard to the definitions of those words in s.12(1) and (3) SGAA.

Sub-sections 12(1) and (3) SGAA state:

(1) Subject to this section, in this Act, employee and employer have their ordinary meaning. However, for the purposes of this Act, subsections (2) to (11):

(a) expand the meaning of those terms; and
(b) make particular provision to avoid doubt as to the status of certain persons. . . .

(3) If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

In Virdis Family Trust t/a Rickard Heating v Fed Commission of Tax [2022] AATA 3, the taxpayer’s business sells and installs cooling and heating systems. The company hires Mr Pirie. This is under a letter of engagement. It was not legally prepared. It states Mr Pirie is a “Sub-contract plumber”.

• This is for which he is paid an hourly rate for work allocated each day.
• There is no capacity to delegate the work.
• The taxpayer pays for the materials.
• But Mr Pirie pays the expenses for his own van, tools and mobile telephone.

The non-legally prepared agreement describes Mr Pirie as a subcontractor.

• But the court rules that he is an employee.
• This is in accordance with the extended meaning of that term as outlined in s 12(3) SGAA.
• And the taxpayer is liable to pay superannuation on Mr Pirie’s behalf.

The court states that the contract is the paradigm kind of agreement that is caught by s 12(3) for contracts principally for labour.

Accordingly, the court upholds the Superannuation Guarantee Charge (SGC) assessments. These were issued to the taxpayer for failing to make super contributions on behalf of Mr Pirie.

Interestingly, the fact that Mr Pirie agreed to pay his own superannuation is irrelevant to the taxpayer’s liability to pay the SGC.

See: The Trustee For Virdis Family Trust t/a Rickard Heating Pty Ltd and FCT [2022] AATA 3, AAT, Reitano M, 5 January 2022

A cornerstone of the Superannuation Guarantee Scheme is that employers who do not make superannuation contributions for the benefit of an employee to a superannuation fund are liable to pay the Superannuation Guarantee Charge. This includes the amount of the contributions that should have been made.

What Virdis cases teach us – ’employer’ has a broad definition for compulsory superannuation

You can be a contractor, and your ’employer/principal’ may still be liable to pay your superannuation. You cannot contract out of this. See the Superannuation Guarantee (Administration) Act 1992 (Cth).

The definition of ‘employer’ and ‘employee’ in s.12 is wider than their ‘ordinary meaning’. It is wider than most businesses think. That puts the problem back on accountants and financial planners to educate their business clients.

Section 12 acknowledges the widening of the definition. This is by using the words:

‘for the purposes of this Act’

‘expands the meaning of those terms’

‘make[s] particular provision to avoid doubt as to the status of certain persons’.

The clear intent is to widen the class of people who are treated as employees. This is for making superannuation contributions to these ‘contractors’.

The Superannuation Guarantee Scheme has no regard for private arrangements that may have been made to pay amounts of one kind or another as a substitute for superannuation contributions, nor for arrangements that are made to avoid obligations created by the Act: if superannuation contributions are not made to employees as defined by the Act, the Superannuation Guarantee Charge applies regardless.

It is not for parties to a private contract to determine when superannuation payments apply. The fact that Mr Pirie agreed to pay his own superannuation contributions or agreed that the business should not pay them is irrelevant to the liability to pay the Superannuation Guarantee Charge.

At the very least, the Contractor/Principal relationship should be legally prepared. This is by building an Independent Contractors Agreement on Legal Consolidated’s website.

The principal may have to pay superannuation for their contractors

Sometimes the Principal must hold back PAYG for their contractors. Similarly, at times, the Principal has to pay superannuation to the Contractor. This is just like an Employer paying the compulsory super for their employees.

When does the Principal have to pay the minimum level of SG contributions to a complying superannuation fund? This is on behalf of their Contractor.

Under Section 12 Superannuation Guarantee (Administration) Act 1992 (Cth) states that ‘employee’ and ‘employer’ have their ordinary meanings. But section 12 extends their meanings. Section 12(3) of that act states that in augmentation of the typical law, an employee:

if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

For the ATO, your contractor must be paid the compulsory super as stated in SGR 2005/1 ‘Superannuation guarantee: who is an employee?’. The ATO is on a winning streak at the moment with the multi-factorial approach:

For subsection 12(3), where the terms of the contract, in light of the subsequent conduct of the partie,s indicate that:

• the individual is remunerated (either wholly or principally) for their personal labour and skills;
• the individual must perform the contractual work personally (there is no right of delegation); and
• the individual is not paid to achieve a result,

The contract is considered to be wholly or principally for the labour of the individual engaged, and he or she will be an employee under that subsection.

Dental Corporation v Moffet [2020] FCAFC 118

Section 12(3) is considered in the case of Dental Corporation v Moffet. The dentist claims the compulsory super. This is from his Principal, being Dental Corporation.

But the court refused to consider whether the dentist is a contractor or an employee. This is for the compulsory superannuation:

In our opinion, what s 12(3) requires is that: (a) there should be a ‘contract’; (b) which is wholly or principally ‘for’ the labour of a person; and (c) that the person must ‘work’ under that contract. There is no doubt that Dr Moffet provided his work under the Services Agreement so the requirements of (a) and (c) are met. [at 82]

For that reason, the question of whether the Services Agreement, from Dental Corporation’s perspective, was wholly or substantially ‘for’ Dr Moffet’s labour should be answered in the affirmative. It was substantially for that purpose. [at 104]

Finally, we would have rejected Dental Corporation’s submission in this Court that the employment-like setting test should be answered by reference to the same kinds of indicia, especially control which govern the general issue of whether one person is employed by another. This would collapse s 12(3) (on the assumption that On Call is correct) into the ordinary test of employment. It is clear that is precisely what s 12(3) does not mean. [in 108]

Unlike the PAYG rules, Section 12(3) examines the purpose of the contract between the principal and the contractor. It does not do so on the ordinary meaning of ’employee’ and ’employer’.

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1

In the past, most ‘employee versus contractor’ cases have not been tax or superannuation cases. Instead, they are usually fighting over the Fair Work Act 2009 and personal injury law. As to the latter, this is where injured workers or third parties seek to hold businesses vicariously liable for the actions of one of their workers. This is on the basis that they are an employee of that business.

For example:

• My favourite case is the bicycle courier in Hollis v Vabu Pty Ltd [2001] HCA 44.
• Also consider Stevens v Brodribb Sawmilling Pty Ltd [1986] HCA 1. The Court finds that both workers are independent contractors. And, therefore, Brodribb Sawmilling Pty Ltd is not vicariously liable for the injuries sustained to one of the workers by the other worker. The High Court states:

… the common law has been sufficiently flexible to adapt to changing social conditions by shifting the emphasis in the control test from the actual exercise of control to the right to exercise it …

ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

In these cases, the High Court instructs us to examine the rights and duties. This is to decide if a person is an employee or an independent contractor. 

Are you an employee or an independent contractor? Refer to the legal rights and obligations outlined in the contract. If you do not have a legally prepared written agreement, your position is weakened.

This approach is similar to that of the High Court in WorkPac Pty Ltd v Rossato [2021] HCA 23. That is a case of casual employment.

These two cases move away from the “multi-factorial” test. This test was adopted in Australian courts over the past 28 years.

It is a new approach. Legal Consolidated believes it provides increased certainty for businesses.

New approach to employee vs contractor in ZG Operations

• Before, under the “multi-factorial” approach, the terms of the contract were relevant. But not conclusive. It was a dog’s breakfast of issues and how the relationship changes over time. Very messy. Very expensive to work out.
• If you have a Legal Consolidated Independent Contractors Agreement or Employment Contract, it outlines all the terms of the parties’ relationship. Then the High Court states that you escape the “multi-factorial” approach. Instead, the court examines the rights and obligations outlined in the contract itself. This saves the need to try to unravel how the working relationship unfolds.
• The decisions give much-needed certainty. This is for companies that have properly recorded their relationships with employees and independent contractors. This is in well-drafted written contracts that correctly set out the nature of the relationship.

New rules for contractor vs employee

1. The terms of the contract are central. This involves determining the nature of the relationship between a principal/employer and a contractor/employee. The subsequent conduct of the parties is irrelevant.

However, simply asserting in a contract that a worker is a contractor may help, but it does not make it so in itself. An assessment of the relationship is undertaken. This is based on the terms of the contract.

A significant question is who controls the work? How is it carried out? To what level does the worker operate an independent enterprise?

2. The Legal Consolidated Independent Contract reflects that the contractor:

• has control over the relevant work
• how it is to be performed
• demonstrates that the contractor is running their own business rather than that of their principal.

There may be commercial limits on the amount of freedom a Principal is willing to provide a Contractor.

3. Legal Consolidated’s Independent Contractor’s Agreement contains clauses that help show that the agreement is contained wholly in the written contract. Our clauses clearly state that the contract reflects the entire agreement of the parties. We, of course, allow variations to the contract by an exchange of emails. This includes a waiver of the rights under the contract. This ensures that the ICA does not fall foul of the new rules.

4. Most contractors operate through a company or a company as trustee of a Family Trust. This advantage has less value. (But obviously, for asset protection, operating through a corporate trustee of a Family Trust is preferred.)

What you need to do: Contractor vs Employee

Employers need to exercise caution when classifying relationships with their employees. Failure results in the employer’s liability for:

1. Superannuation charges
2. Workers compensation
3. Payroll tax
4. Back pay
5. Unfair dismissal

It is not always clear whether an employment relationship exists. Businesses must correctly classify their workers as employees or contractors. Ensure that you are accurate in the classification process. Any error is costly. To ensure the highest possible chance of being an independent contractor, you need to build an independent contractor’s agreement.

On the Legal Consolidated Barristers and Solicitors website, you can build:

1. Independent contractor agreements
2. Employment contracts

You must have one or the other, not both.

The definition of ‘employee’ has many meanings

The impost of each of the five employment taxes is dependent on the definition of ‘employee’.

However, the meaning of employee is defined differently for each purpose. Additionally, the existence of multiple administrators at the federal and state levels introduces further complexity, even if the definitions are the same.

This is a mess.

And it is the employer who suffers. Regulators also change their minds.

The difference in the definition of ‘employee’ for these taxes, as well as confusion in determining who is an employee, often leads to errors in compliance. This is with the requirements of the various taxes and charges levied on employers.

Our accountants and advisers tell us that this shows itself in 3 failures:

1. to meet payroll tax, PAYG withholding and superannuation obligations for contractors who
   fall within the extended definitions of ‘employee’ for those purposes
2. to identify that someone describing themselves as a contractor is, in fact, an employee
3. to keep pace with changes in the labour market, to encompass the emerging work relationships resulting from the sharing or gig economy.

Each of the above problems exposes employers to tax compliance costs.

The Contractor vs Employee 5-way test:

Test yourself: Are you an independent contractor or an employee?

Contractor vs Employee?	Employee	Contractor
Are you paid based on a set amount per period (this includes award rates, annual salary, and hourly rates)?	Yes	No
Are you paid based on a quoted price for an agreed outcome?	No	Yes
Are you responsible for equipment, tools, plant, or motor vehicles?	No	Yes
Are you paid an allowance to cover expenses for providing tools for work?	Yes	No
Are you allowed to pay other people to do work for you?	No	Yes

Is Tony a contractor or an employee?

We will now test to see if you have understood the above information. You will now apply the legal tests to a typical business scenario. Your analysis will show how the Fair Work Commission or the Australian Taxation Office views the challenge of a contractor or an employee.

The question draws on principles from cases such as Humberstone v Northern Timber Mills [1949] HCA 49.

1. The Facts of the Contractor example

A business engages a marketing consultant, ‘Tony’, under a contracting arrangement.

• Tony contracts through his company, which holds an Australian Business Number.
• Tony is contracted to work set hours.
• Tony uses the principal’s laptop and email account.
• Tony reports directly to a manager employed by the principal.

This situation raises critical legal questions that an adviser must address.

2. The Australian Business Number Myth: Why a Company is Not Enough

Does an Australian Business Number and company structure guarantee contractor status?

No. This is a dangerous myth. It helps only.

Operating through a company and holding an Australian Business Number are indicators of an independent contractor. However, they are not decisive. The High Court of Australia in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45 made it clear. You cannot call something a duck when it has all the features of a rooster.

The courts look past the corporate structure. They examine the reality of the relationship. If other factors suggest employment, the corporate veil provides only limited protection.

3. Control Over Tools: A Key Indicator of Employment

Is providing tools and equipment a deciding factor?

It is a major red flag.

A business that provides the necessary tools and equipment suggests an employment relationship. It indicates the worker does not run an independent business. Instead, the worker is integrated into the principal’s business.

While not a fatal flaw in itself, it is a significant factor. It weighs heavily in favour of Tony being an employee.

4. The Control Test: Supervision and a Contractor’s Independence

Can a contractor report to a manager?

These points directly point to an employment relationship.

A genuine contractor receives direction on the outcome of a project. An employee is managed in the process of their work. Reporting to a direct manager who supervises day-to-day activities is a classic exercise of control. This is one of the most powerful indicators of an employment relationship.

5. Conclusion for ‘Tony’ the Contractor example

Based on these facts, Tony is at an extremely high risk of being deemed an employee. The set hours, the provision of equipment, and the direct reporting relationship likely outweigh his corporate structure.

This is precisely the type of ambiguous, high-risk scenario that a Legal Consolidated Independent Contractor Agreement is designed to prevent. The process of building our agreement forces the Principal to address these issues head-on. It helps structure the relationship correctly from the start. This ensures it is a genuine, defensible contracting arrangement.

See also:

• The employee couldn’t take the boss’s clients for 6 months – thanks to a non-solicitation clause

• Can you call your boss a ‘pig’ on Facebook? Unfair dismissal

• Garden leave in Employment Contracts: Ron Dennis vs McLaren F1 team

• Employment Contracts to stop Affairs and Fist Fights

• Imposing new Rules for Employees after the Employment Contract is signed

• Why doesn’t your Employment Contract allow for specific Awards?

• Disaster can happen with no employment termination clause