Engaging people as Contractors has been on the rise over the last few years. More and more often I am asked ‘can I engage this person as a Contractor as opposed to an employee?’ Sometimes it is the individual that is wanting to be engaged as a Contractor and sometimes it’s the business wanting to engage them as a Contractor. In the majority of cases I see, the motivation for being a Contractor is about flexibility. I haven’t come across situations where businesses are trying to engage someone as a Contractor to negate their obligations in terms of employee entitlements such as superannuation, leave, penalties etc. However, I know that can be a motivation for some businesses.
It is important to remember the Contractor vs Employee decision needs to be looked at through a legal lens, not just whether both parties are happy and the arrangement suits from a flexibility perspective. Getting it wrong can lead to significant financial penalties.
Understanding the Difference
At a glance, contractors and employees can look similar; they both perform work for your business. However, legally, they are very different.
Employees work in your business. They are part of your team, covered by employment laws, and entitled to benefits like leave, superannuation, and protections under the Fair Work Ombudsman framework.
Contractors run their own business. They provide services to your business and are responsible for their own tax, insurance, and super.
Why the Distinction Matters
Incorrectly classifying a worker as a Contractor, intentionally or not, is known as sham contracting, and it comes with legal ramifications.
If someone is effectively working as an employee but engaged as a contractor, your business could be at risk of:
- Back payment of wages and entitlements
- Superannuation contributions
- Penalties and fines
- Legal disputes
What determines the Contractor vs Employee Relationship?
There is no single test, it’s about the totality of the relationship. For example:
- Control over work
- Employee: You direct how, when, and where work is done
- Contractor: They have autonomy in how they deliver the work
- Integration into the business
- Employee: They are part of your operations. They use your systems, represent your brand. Tools and equipment are typically provided by the employer.
- Contractor: They operate independently, they use their own software systems, they may have their own brand. A Contractor supplies their own tools and equipment.
- Ability to subcontract
- Employee: Performs the work personally
- Contractor: Can delegate or subcontract
- Payment structure
- Employee: Paid wages or salary
- Contractor: Paid per project or invoice
Where issues arise
It gets complex and risk arises when the following occurs:
- Engaging “contractors” who work regular hours like employees
- Engaging long-term contractors without reviewing the relationship / nature of the engagement
- Assuming an ABN automatically makes someone a contractor
- Using contractor arrangements to reduce costs without understanding the risks
These situations may feel practical in the moment however they can create serious compliance issues later. These serious issues can often arise years later. I see it all the time; when things are good in the moment, they are good, but it can be months, if not years later that it can come back to bite you.
When someone insists on being a Contractor
It is not uncommon for an individual to prefer operating as a contractor, whether for tax reasons, autonomy, or perceived higher take-home pay. However, preference alone does not determine the legal relationship. You must assess the arrangement against the legal tests.
If the role is, in substance, an employment relationship, you should not engage the person as a contractor, even if they request it. You can try clearly explaining the risks to them, outline why the role is considered employment, and offer an employment contract that reflects this.
If the individual declines, you may need to look at how you can redesign the role, so it genuinely meets contractor criteria (for example, project-based, outcome-driven work with true independence). It’s also important to document your assessment and decision-making process, and seek advice where needed, this demonstrates due diligence if your arrangements are ever called in to question.
Regardless of if you engage them as an employee or a Contractor, it’s vitally important to put in place an Employment Contract or a Contractor Agreement. Having nothing in place, that sets out the terms and conditions of engagement and for a Contractor how the work is performed/to be delivered is high risk.
My 4 top tips to minimise issues and reduce risk:
- Review your current workforce – Are any contractors effectively employees?
- Use clear agreements – Ensure contracts reflect the true nature of the relationship
- Avoid “set and forget” – Reassess arrangements as your business evolves
- Seek advice early – It’s far easier to set things up correctly than fix issues later
If you are unsure about your current arrangements, it’s worth taking a closer look. A proactive approach now can save significant time, cost, and stress down the track.
