Contractor vs employee in Australia: how to tell for your first worker

Here’s the idea in one sentence: a contractor runs their own business and sells you a result, while an employee works in your business and sells you their time.

Everything else in this lesson is detail on that one idea. It matters because the answer decides who pays super, who withholds tax, who’s covered by workers compensation and who gets paid leave. Get it wrong with your very first helper and the bill can land years later, all at once.

Most first-time employers aren’t trying to dodge anything. They simply hear “just get them on an ABN” from a mate and assume that settles it. It doesn’t.

Is my worker a contractor or an employee? The quick check

Think of it like borrowing a ladder versus hiring a painter. If you lend someone your ladder, tell them which wall, which colour and what time to start, and pay them by the hour, they’re helping you. If they turn up with their own ladder, quote a price for the job and fix any drips at their own cost, they’re running a business.

Run your first worker through this quick check. No single answer decides it; you’re looking at the overall picture.

Question	Points to employee	Points to contractor
Who decides how, when and where the work is done?	You do	They do, within the job’s scope
How are they paid?	By the hour, day or week	A quoted price for a result
Can they send someone else to do the work?	No, it has to be them	Yes, they can delegate or subcontract
Whose tools and vehicle?	Yours	Theirs, and they’re significant
Who fixes mistakes at their own cost?	You	They do
Do they work for other clients?	No, mainly just you	Yes, and they advertise
Do they look like part of your business?	Your uniform, your email, your van	Their own branding and insurance

If most of your ticks sit in the left column, treat the worker as an employee, whatever they call themselves.

Quick check: the four myths that trip up first-timers

• “They’ve got an ABN, so they’re a contractor.” business.gov.au puts it plainly: “Having an ABN is not the deciding factor.”
• “It’s only short-term or casual.” Casual and temporary workers can be employees.
• “We signed a contractor agreement.” A contract helps, but its terms need to describe a genuine contracting arrangement, and under workplace law the day-to-day reality counts too.
• “They asked to be a contractor.” A worker’s preference doesn’t change what the relationship actually is.

Employee or contractor test in Australia: why there are really two

Here’s a wrinkle most articles skip. Two regulators look at the question, and they don’t look in quite the same place.

For tax and super, the ATO looks mainly at the contract. Following High Court decisions in 2022, the ATO’s ruling TR 2023/4 focuses on the legal rights and obligations the parties agreed to, usually in writing. Factors include control, the right to delegate, whether the worker is paid for a result, who supplies significant tools and who wears the risk.

For wages and entitlements, Fair Work looks at the whole relationship. From 26 August 2024, the Fair Work Act’s definition of employee changed. The Fair Work Ombudsman’s whole of relationship test means the “real substance” and practical reality of the arrangement is weighed, not just the paperwork. So a contract that says “contractor” but describes a worker who turns up at 7am in your shirt, uses your gear and does what you say on the day can fail.

The practical lesson for a beginner: write down an arrangement that’s honest, and then run the job the way the paperwork says. If both line up, you’ll usually land in the same place under both tests.

There’s one narrow exception worth knowing about. Highly paid contractors engaged as individuals can opt out of the whole of relationship test. The Fair Work Ombudsman sets the threshold at $190,100 from 1 July 2026. That’s rarely relevant to a first helper on the tools.

Do I pay super for contractors?

Sometimes, and this one surprises a lot of new owners.

If you pay an individual under a contract that’s wholly or principally for their labour, the law can treat them as an employee for super guarantee purposes, even if they’re a genuine contractor for everything else. Think of a tiler you pay to lay tiles you’ve supplied, or a cleaner paid per clean using your products. You’d generally owe super on the labour part of what you pay them.

The super guarantee rate has been 12% since 1 July 2025. And from 1 July 2026, under Payday Super, employers pay super at the same time as wages, with the money due to reach the fund within seven business days of payday. That makes super a weekly or fortnightly cost in your cash flow forecast, not a quarterly one.

The rule generally doesn’t apply when you contract with a worker’s company, trust or partnership rather than with them personally. But an entity in the middle doesn’t fix an arrangement that’s really employment.

What changes once you call it employment?

Here’s who carries what, in plain terms.

Obligation	Employee	Genuine contractor
Tax	You withhold PAYG from each pay	They pay their own tax
Super	You pay 12%, on Payday Super timing	Usually them, unless paid mainly for labour
Leave and public holidays	You provide them (not for casuals)	None from you
Minimum pay	The award or agreement sets it	Whatever price you both agree
Workers compensation	You insure them (state rules apply)	They insure themselves, though state definitions vary
Payroll setup	Single Touch Payroll reporting	They invoice you

A heads-up on that workers compensation and payroll tax row: each state has its own definition of “worker”, and they don’t always match the ATO’s or Fair Work’s. Check with your state insurer, or your accountant, before you assume.

Thinking about what a first hire would do to your monthly numbers? You can check your options with a real person without your credit file being touched.

Sham contracting: what’s the real risk for a small business?

Sham contracting is when a business presents someone as an independent contractor when the relationship is really employment. It also covers pressuring an existing employee to switch to a contractor arrangement to do the same work.

Two changes make this more serious than it used to be:

1. The defence got harder. A business can now only defend a sham contracting claim by showing it reasonably believed the worker was a contractor. “I didn’t know” isn’t enough on its own anymore.
2. Underpayment can now be a crime. Since 1 January 2025, intentionally underpaying wages or entitlements can be a criminal offence. Honest mistakes are excluded, and small businesses with fewer than 15 employees that follow the Voluntary Small Business Wage Compliance Code are protected from referral for prosecution.

For most first-time employers, the realistic risk isn’t jail. It’s back pay. If a “contractor” turns out to be an employee, you may owe unpaid super (plus the super guarantee charge, which costs more than paying on time), leave entitlements, award top-ups, and tax you should have withheld. Two years of that for even one worker can add up to a five-figure debt.

An illustrative example: Tom’s first helper

This is a made-up example to show the thinking. No real business is involved.

Tom runs a one-person landscaping business in Geelong. Spring bookings have doubled, and he wants help three days a week laying turf and planting.

His cousin Sam has an ABN from a past job and suggests Tom just pay his invoices. Tom runs the quick check:

• Tom picks the jobs, sets the start time and tells Sam what to do on site.
• Sam uses Tom’s ute, tools and turf cutter.
• Sam would be paid by the day, and can’t send a mate in his place.
• If a section of lawn is laid badly, Tom fixes it.
• Sam doesn’t have other clients.

Every answer points to employee. Tom also notes that even if Sam were a contractor, he’d be paid principally for his labour, so super would be owed anyway.

So Tom puts Sam on as a part-time employee under the relevant award. He sets up payroll software with Single Touch Payroll, gets a workers compensation policy, and adds wages, 12% super on Payday Super timing and PAYG withholding into his 13-week forecast. The forecast shows a tight patch in the first six weeks, before the extra jobs Sam makes possible are invoiced and paid. Tom decides a small buffer will carry him through, and checks the repayments against his slowest month using the method in can you afford the repayments.

The result: Tom’s bank statements now show regular wages, super and tax paid on time. When he applies for finance on a second ute next year, that’s exactly the pattern a lender likes to see.

Can I hire a contractor instead of an employee?

Yes, when the work genuinely suits it. Contractors make sense for:

• specialist jobs you don’t do yourself (an electrician, a web developer, a bookkeeper)
• one-off projects with a clear finish line and a quoted price
• overflow work given to someone who runs their own business with their own gear and clients

An employee usually makes more sense when you need someone regularly, working your way, as part of your team. If you’d like more background on what a first employee costs beyond the wage, our lesson on hiring your first apprentice walks through the on-costs line by line.

How first hires look to a lender

Lenders don’t ask whether you have staff. They look at whether the business can comfortably carry its costs, and your bank statements tell that story. Regular wages, super and tax paid on schedule read as a business that’s growing up properly.

What catches people out is the hidden debt. A misclassified worker can turn into unpaid super and an ATO balance you didn’t know was building. Lenders do consider ATO debt case by case, but it’s far easier to explain a plan than a surprise.

Your first hire is a big step: let’s make sure the money side is ready

Taking on your first worker usually means the business is working: more jobs than one pair of hands can handle. The tricky part is the few weeks or months when wages, super and insurance go out before the extra work has been paid for.

If a small loan or line of credit would make that stretch easier, our enquiry takes about 60 seconds. There’s no credit check when you first enquire, so just asking won’t leave a mark on your credit file. We don’t send your details to a pile of lenders either; they stay with the one person working on them, so your phone stays quiet. A real person reads your situation, rings you and explains what could fit in everyday language. It helps a lot if you fill the form in accurately, especially your turnover, how long you’ve traded and what the hire is for, so we can match you well the first time.

Find out where you stand for your first hire →