Is Your Contractor Actually an Employee?

Classifying a worker correctly as either an employee or an independent contractor is critical for your business. Getting it right can help you avoid major financial and legal issues, while getting it wrong could result in serious penalties — especially if it spans multiple financial years.

If the ATO later determines that someone you treated as a contractor is actually an employee, your business could be liable for:

• Unpaid PAYG withholding
• Superannuation Guarantee charges, including interest and admin fees
• ATO penalties and interest (non-deductible)
• Payroll tax and workers compensation
• Employee entitlements such as leave and unfair dismissal claims

It’s not always easy to tell which side someone falls on. Even if both parties agree they’re working as contractor and client, the ATO may decide otherwise. To protect your business, it’s vital to have a well-drafted written contract outlining the terms of engagement.

A strong contract should cover factors like:

• Control – Who decides how, when, and where the work is done?
• Integration – Is the worker part of your business or running their own?
• Remuneration – Are they paid for time or based on a set outcome?
• Delegation rights – Can they subcontract their work?
• Tools & equipment – Who provides what’s needed for the job?
• Commercial risk – Who is liable for mistakes?
• Exclusivity – Do they work for others too?
• Leave entitlements – Only employees receive paid leave.

Hiring contractors can reduce costs, but if someone operates like an employee — working under your instructions, using your resources, and relying solely on your business — the ATO may deem them an employee. This opens the door to back-payments and compliance risks.

If you’re engaging workers through companies, trusts, or partnerships, your contract is technically with that entity — not the worker. However, the individual may need to deal with the personal services income (PSI) rules.

Likewise, if you’re working as a contractor under terms that align more with employment, you may wish to raise concerns and seek an employment arrangement — though this must be handled carefully.

Need clarity on contractor vs employee classification? Contact us for tailored advice to ensure your business stays compliant