The contract matters, but it's not the whole story

The rules have shifted in recent years, so advice you got five years ago may no longer hold.

In 2022, two High Court decisions (CFMMEU v Personnel Contracting and ZG Operations v Jamsek) said that where there's a genuine written contract, its terms carry the most weight in deciding whether someone is an employee. The ATO updated its guidance to reflect this.

Then, from August 2024, changes to the Fair Work Act swung the pendulum back for workplace law purposes. Fair Work now looks at the real substance and practical reality of the whole relationship, including how it actually works day to day, not just what the paperwork says.

The practical upshot: a well-drafted contract helps, but if the way someone actually works looks like employment, a "contractor" label won't protect you. Different laws (tax, super, Fair Work, payroll tax and workers compensation) can also each apply their own test, so a worker can be a contractor for one purpose and an employee for another.

Signs someone is really an employee

No single factor decides it. Courts and the ATO weigh up the whole picture, but these are the questions that come up most often.

If most of your answers land in the middle column, it's time to take a closer look.

The super trap: genuine contractors can still be owed super

This is the one that catches many business owners out. Superannuation law has a wider definition of "employee" than most other laws.

If you pay a contractor wholly or mainly for their labour and skills, and they have to do the work personally, you may have to pay super guarantee for them even if they're a genuine contractor with an ABN. Common examples include individual tradies paid by the hour, cleaners, and freelancers who do the work themselves.

Having an ABN doesn't change this. Neither does the worker asking to be paid as a contractor, or signing something saying they'll look after their own super.

What it costs to get it wrong

Misclassification rarely costs just one thing. The bills tend to stack up together, and they can go back several years.

• Unpaid super: the super guarantee charge includes the missed super, interest and an administration fee. Unlike on-time super, the charge isn't tax-deductible, and penalties can apply on top.
• PAYG withholding: if you should have withheld tax from wages and didn't, the ATO can impose penalties, and you may lose the deduction for those payments.
• Payroll tax: state payroll tax rules, including contractor provisions, can bring contractor payments into your wages total if your business is over the threshold.
• Workers compensation: an underinsured workforce can mean back-premiums, and real exposure if a worker is injured.
• Employee entitlements: a worker found to be an employee may claim back pay for leave, overtime, penalty rates and minimum award wages.
• Fair Work penalties: misrepresenting employment as contracting (sham contracting) carries significant civil penalties.

On top of the money, there's the time and stress of an ATO review or Fair Work claim, which is often the part business owners regret most.

How to protect your business

1. Review every regular contractor. Pay attention to anyone who works mainly for you, is paid by the hour, or has been with you a long time.
2. Use the ATO's employee/contractor decision tool. It's free on the ATO website and gives you a useful first read, plus a record of your reasoning.
3. Get the contract right, and live by it. A written agreement should reflect how the relationship really works. If the day-to-day reality drifts, update the arrangement.
4. Check super separately. Even where someone is a genuine contractor, ask whether they're paid mainly for their labour. If so, super may be payable.
5. Don't forget the states. Check payroll tax and workers compensation rules where you operate, as they apply their own tests.
6. Fix problems early. If you find past underpayments, voluntary disclosure to the ATO generally results in lower penalties than waiting to be audited.

How North Coast Accounting can help

If you're not sure whether your workers are set up correctly, a quick review now costs far less than an ATO or Fair Work dispute later. The team at North Coast Accounting can:

• review your current contractor arrangements and flag any risks
• work out whether super is payable on contractor payments
• check your payroll tax and PAYG obligations
• help you correct past issues, including voluntary disclosures to the ATO

Get in touch with North Coast Accounting today to book a review of your contractor arrangements. Visit www.ncaaccountants.com.au or call our office.

This article is general information only and doesn't take into account your personal circumstances. It isn't legal or tax advice. Please speak to a qualified adviser before making any decisions.