Employee vs. contractor: how to classify workers in Australia (quiz included)

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 $238,920 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, annual leave entitlements, and superannuation benefits. This has a negative impact on the company’s reputation, too. 

This guide explains how to classify your workers correctly and stay compliant with Australian labour and employment laws.

Classifying workers in Australia

As in many countries, Australia categorises employees and contractors differently—and correctly classifying them can be the difference between smoothly running your team and racking up huge fines and penalties (more on this 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 crucial distinction between an 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 (NES) established by the Fair Work Act 2009, including:

• Maximum weekly work hours
• Superannuation guarantee
• Annual leave
• Public holiday pay
• Sick leave
• Overtime pay
• Parental leave

What is a contractor in Australia?

In Australia, a contractor is an individual who provides services to a business or organisation but is not an employee of that business or organisation. 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 to classify your global workers in 90 seconds

Are you classifying your workers correctly? Find out now.

Accurately classifying your employees and contractors is crucial for complying with employment regulations in Australia and worldwide. With our free classification quiz, you can mitigate potential business risks and ensure you’re correctly classifying employees and contractors—in just 90 seconds.

How Australia tests for misclassification

If you want to classify workers yourself, 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 and 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 prioritised the terms of the contract itself to delineate employees from independent contractors. Now, courts will focus on written contracts more than factual working conditions unless its terms are violated.

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 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 subcontract work, while employees aren't.
• Employee entitlements: Whether benefits like annual leave, long service leave, and public holiday 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 simultaneously.

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.

Classifying workers in Australia is complex. Check if you're classifying them correctly with our free quiz.

When to make superannuation 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 labour 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 contributions that equate to a percentage of their wage.

Manage contractors effortlessly under a single system with Rippling

Penalties for misclassifying workers in Australia

Businesses with 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 18,780 for individuals and AUD 93,900 for companies
• Make-up payments for every missed superannuation contribution, plus interest and admin fees.
• Additional fines up to twice the superannuation charge.
• A failure-to-withhold-taxes (including income tax, PAYG, GST, and more) cost of the total 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 the 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.

Hire and pay contractors and employees in Australia with Rippling—quickly and compliantly

Running a global workforce is hard work—especially when it comes to understanding and complying with local labour laws.

• With Rippling, you can onboard and pay contractors in Australia in a single system with localised onboarding, flexible payments in AUD or USD, and country-specific consulting agreement templates.
• You can also hire full-time employees in Australia through a Rippling entity. Rippling provides benefits, ensures compliance, and handles employee events like leave, performance management, and terminations.

See Rippling in action today.

Rippling and its affiliates do not provide tax, accounting or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.