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Australia Employee vs Independent Contractor Guide

the distinction between the employee and the independent contractor in Australia. The guide covers: the common law test (the "multi-factor test") — the ATO and the courts apply the "multi-factorial test" to determine the working relationship; the key factors include: (a) the "control" — does the employer control how, when and where the work is performed (the high control indicates the employment), (b) the "substitution" — can the worker delegate the work to another person (the right of substitution indicates the contract), (c) the "tools and equipment" — who provides the tools, the equipment and the premises (the worker providing the own equipment indicates the contract), (d) the "risk" — does the worker bear the commercial risk (the profit and the loss risk indicates the contract), (e) the "exclusivity" — does the worker work exclusively for one principal (the exclusivity indicates the employment); the ABN requirements (the "Australian Business Number") — the independent contractor must have the ABN; the contractor must register for the GST if the annual turnover exceeds $75,000 (the "GST registration threshold"); the principal engaging the contractor without the ABN must withhold the "PAYG withholding at the highest marginal rate" (the "45% plus the Medicare levy" — the "no ABN withholding rule" under the "PAYG withholding" rules); the PAYG withholding obligations (the "tax withholding for the employees and the contractors") — the employer must withhold the PAYG from the payments to the employee (the "salary and the wages") and report through the "Single Touch Payroll (the STP)"; the principal does not withhold the PAYG from the payments to the contractor (the "contractor payments") unless the contractor fails to provide the ABN; the superannuation guarantee (the "SG for the employees") — the employer must pay the "superannuation guarantee" at the rate of 11.5% (for the 2024-25 income year, rising to 12% by 2025-26) on the "ordinary time earnings" of the employee; the employer does not pay the SG for the genuine independent contractor (the "contractor working under the contract for services") — the contractor must arrange the own superannuation.

Consequences of Misclassification

  • Tax and super shortfall: If the ATO determines that the worker is the employee despite the classification as the contractor, the principal is liable for the unpaid PAYG withholding, the unpaid superannuation guarantee (the "SG charge" including the "interest and the administration fee"), the payroll tax and the workers' compensation premiums. The ATO can issue the "employer obligation direction" and impose the penalties.
  • Sham contracting arrangements: The employer who deliberately misrepresents the employment as the independent contracting arrangement to avoid the employer obligations may be subject to the "sham contracting" provisions under the "Fair Work Act 2009". The penalties for the sham contracting: up to $18,000 for the individual and up to $90,000 for the body corporate. The worker can also claim the unpaid entitlements (the "annual leave, the sick leave, the redundancy pay").
  • Personal services income (PSI) rules: The contractor who provides the personal services (the "income mainly from the personal effort or the skills") may be subject to the "PSI rules" even if the relationship is the genuine contract. The PSI rules restrict the deductions and require the contractor to treat the income as the "personal services income" unless the contractor passes the "results test" (the "unrelated clients test, the employment test, the business premises test").

For the PSI rules and the tax treatment of the personal services income, see our Personal Services Income Guide →.

ATO Tools and Guidance

  • ATO Employee/Contractor Decision Tool: The ATO provides the "Employee or Contractor Decision Tool" on the ATO website (ato.gov.au) to help the principals and the workers determine the correct classification. The tool asks the questions about the control, the substitution, the tools, the risk and the exclusivity and returns the indicative classification.
  • Written agreement importance: The written contract (the "independent contractor agreement" or the "services agreement") should clearly state the terms of the engagement, including the right of substitution, the payment terms, the provision of the tools and the equipment and the dispute resolution. The ATO considers the written contract but also examines the actual working relationship (the "substance over form" principle).
  • Industry-specific guidance: The ATO publishes the industry-specific guidance for the construction, the transport, the IT, the cleaning and the courier industries. The construction and the building industry have the additional rules under the "Personal Services Income" rules and the "Construction Industry" guidelines.

For the employer obligations and the PAYG withholding, see our Hiring Employees Guide →.