Employee vs. Contractor: How to Classify Workers in Australia (Quiz included) [2024]

When hiring workers in Australia, it's crucial to classify them correctly—otherwise, you risk significant fines and penalties. 

As part of Australia’s crackdown on the misclassification of workers, courts have ordered companies to pay steep fines in back taxes and penalties. For instance, a judge issued $286,704 in fines to Happy Cabby, an airport shuttle service, for treating employees as contractors in 2013. 

Misclassification is also damaging for workers: it cheats employees out of benefits and protections they're entitled to under Australian law, such as minimum wage, overtime pay, vacation pay, and superannuation benefits. This has a negative impact on the company’s reputation, too. 

Learn about how to classify your workers correctly—and stay compliant with Australian labor and employment laws—in this guide.

Classifying workers in Australia

As in many countries, Australia categorizes employees and contractors differently—and classifying them correctly can be the difference between smoothly running your global team and racking up huge fines and penalties (more on those below).

What is an employee in Australia?

In Australia, an employee is defined as an individual who works under the supervision of an employer as a representative of their business, in return for wages or other remuneration.

Employees are defined differently depending on their corresponding “Modern Award,” which outlines minimum working conditions across industries. The most important distinction between employee and contractor is that Australia's robust worker protection laws always apply to employees—meaning they're always entitled to statutory benefits defined by the country’s National Employment Standards established by the Fair Work Act 2009, including:

• Maximum weekly work hours
• Superannuation guarantee
• Vacation pay
• Holiday pay
• Sick leave
• Overtime pay
• Parental leave

What is a contractor in Australia?

In Australia, a contractor is defined as an individual who provides services to a business or organization, but who is not an employee of that business or organization. Independent contractors negotiate their own working arrangements. They’re also self-employed, effectively running their own business instead of working on behalf of an employer.

How Australia tests for misclassification

If you want to classify workers yourself, you should consider how Australian authorities evaluate sham contracting in employment relationships.

For decades, courts relied on a “multi-factorial” approach to test for misclassification, which meant looking at the facts of a working relationship along with its broader context.

But in 2022, the High Court of Australia ruled on two cases (Energy Union & Anor v. Personnel Contracting Pty Ltd and ZG Operations Australia Pty Ltd v. Jamsek) that drew focus away from the context of the relationship and instead prioritized the terms of the contract itself to delineate employees from independent contractors. Now, unless its terms were violated, courts will focus on written contracts more than factual working conditions.

To see whether the written agreement accurately reflects a worker’s relationship, courts will focus on the following factors:

• Type of contract. Whether it’s for employment or for services.
• Contracting party. Whether the worker contracts as an individual or via a corporate entity/personal services company (an individual can still be a contractor if engaged in their individual capacity)
• Control. Whether the company has the right to direct how they do the work.
• Subcontracting. Contractors are generally able to do so, while employees are not.
• Employee entitlements: Whether benefits like annual leave, long service leave, and vacation pay are provided for in the contract.
• Exclusivity of service. Employees perform services exclusively for the employer, while contractors can provide the services to more than one person/business at the same time.

Keep in mind that if the terms of a contract are disputed, Australian courts and tax authorities look at all aspects of the working relationship, and no single factor should be considered conclusive for classifying a worker.

When to make pension contributions for your Australian contractor

Independent contractors usually make their own superannuation contributions. However, companies may have to make payments on a contractor’s behalf if the worker is paid mainly for their labor and not contingent upon a specific result (e.g., a freelance secretary doing clerical work 15 hours a week). In this case, employers have to offer contractors a choice of a super fund within four weeks of their start date and guarantee to contribute a percentage of their wage.

Penalties for misclassifying workers in Australia

Businesses found to have misclassified employees as contractors in Australia face serious financial risk. Here are some of the potential costs, fines, and penalties:

• Court-ordered fines of up to AUD 16,500 for individuals and AUD 82,500 for companies.
• Make-up payments for every missed superannuation (Australia’s pension system) contribution, plus interest and admin fees.
• Additional fines up to twice the amount of the superannuation charge.
• A failure-to-withhold-taxes (including income tax, PAYG, GST, and more) cost of the full amount that should’ve been withheld.

There's more than just the financial risk. Companies found misclassifying workers can suffer other consequences, such as legal disputes, reputational damage, difficulty recruiting new workers, negative impact on employee morale, and increased scrutiny from government agencies.

The Australian Taxation Office (ATO) and other federal and state authorities (including Fair Work Ombudsman) are motivated to investigate businesses they suspect are misclassifying workers so they can increase their tax revenue. Misclassification, whether accidental or intentional, is risky and potentially costly.