13 March 2026
Employee or contractor?
Time and again, we’ve seen businesses misclassify their workers and then have to correct the mistake. In many cases, misclassification isn’t intentional.
The distinction between employees and contractors isn’t based on what you call the relationship. It’s really based on how it operates in practice, as outlined in the law by the Fair Work Ombudsman and the ATO.
However, whether intentional or deliberate, incorrectly classifying between the two employment types can—and does—result in severe penalties. We’ve seen instances where businesses only realise their mistake in classifying when it becomes a problem.
Understanding the difference between the two influences entitlements, risk, and even how issues are managed over time.
In this blog, we unpack why the distinction matters, where businesses commonly get it wrong, and what to think about before engaging workers.
Independent contractors work for themselves by providing services to another person or business (Fair Work). They’re also called contractors or subcontractors.
Contractors usually negotiate their own fees and working arrangements, and can work for more than one client at a time.
An employee, on the other hand, serves in a business and performs work as a representative of the business. The work they do furthers the business.
In practice, the difference comes down to factors like control, independence, and how the work is performed. For example, contractors will typically have more control over how and when they complete work, while employees are directed by the business.
The law applies a multi-factor test to determine whether a worker is an employee or an independent contractor. This involves assessing the overall relationship between the parties, including the terms of the contract, the level of control over how work is performed, the worker’s independence, whether they can delegate work, and how they are integrated into the business. The outcome depends on a holistic assessment of the entire working arrangement.
Upon first glance, classifying a worker as an employee or a contractor might look like a matter of compliance.
But if we look deeper, it affects more than the compliance piece.
How a worker is classified affects their:
And for business owners, classification shapes what obligations you have towards your workers. That has a flow-on effect on the risks the business carries.
Classification isn’t a matter of preference or convenience. Calling someone a contractor, or stating them as such in an employment contract, doesn’t automatically make them one. What the law looks at is the working relationship.
Getting the classification right early gives both the business and its workers clarity. For a business owner, it reduces the likelihood of disputes, claims, or compliance issues coming up.
In many cases, businesses don’t get classification wrong because of malicious intent or because they want to cut corners. They get it wrong because arrangements change or evolve over time, and they don’t get revisited.
One of the most common issues that gets flagged in the employee vs contract conversation is sham contracting. Sham contracting is when a worker is engaged as a contractor, but in reality, the relationship looks and works like employment.
Let’s say that Worker A was engaged as a contractor by a business, and this decision was made because of flexibility or cost reasons. At the time that Worker A was hired, the relationship was purely contractual. However, over time, it could have evolved into more than a contractual relationship. Worker A may be directed like an employee, integrated into the business. This increases the risk that they’re legally considered an employee, regardless of what the contract says.
The example above is where businesses can expose themselves to risk. It’s a common enough occurrence that the government has defined sham contracting and placed guardrails around what a genuine contractual arrangement is.
We’ve broken this down further in our guide to sham contracting and how to avoid it.
Another common issue? Treating classification as a one-off decision.
It’s risky to assume that once a worker has been classified, the decision doesn’t need to be revisited. Contractor arrangements can start out as compliant, but can change as the business grows or needs shift.
Regularly reviewing contractor arrangements helps ensure that what’s happening in practice is still aligned with how the worker is engaged on paper. It’s also a way to identify risks early.
Read our blog on the role of regular contract reviews here.
There are some common myths when it comes to classification, and the ATO has helpfully fact-checked these.
Surprised by any of these common myths? Read more on the ATO’s page here.
If you’re reading this and you’re trying to sift through information about how to correctly classify your workers, you’ve come to the right place.
Looking to hire a worker? Before you do, pause and decide how you’ll be engaging them. Consider the nature of the work, control, and expectations. This step usually gives employers more clarity into whether they’re hiring for an employee versus a contractor.
Another thing we can’t emphasise enough is that you need to have clear documentation when bringing someone on. Documentation like the Position Description and Employment Contract should answer the questions above, and also clearly state whether your worker will be hired as an employee or a contractor.
Finally, we always advise businesses to regularly review arrangements periodically.
Classifying a worker as an employee vs an independent contractor isn’t always straightforward. Your business might have evolved from what it was a couple of years ago, and your working arrangements might have too. What once was compliant may not be compliant today.
If you’ve read the above and feel like you still need clarity and additional advice or support when it comes to correctly classifying your workers, why not give us a call? You can book a discovery call with our team today.
