Employees vs. Contractors: What Sets Them Apart
The Australian Taxation Office (ATO) has revised its guidance on how to distinguish between employees and independent contractors. Whether you’re a business owner or a worker, understanding these differences is essential to avoid costly mistakes and stay compliant with tax, super, and workplace regulations.
Contents
- 1 Why Understanding the Differences Between Employees and Contractors in Australia Matters
- 2 Key Differences Between Employees and Contractors in Australia
- 3 Superannuation and the Differences Between Employees and Contractors
- 4 Workers Who Are Always Employees
- 5 Companies, Trusts, and Partnerships as Contractors
- 6 Why Getting This Right Matters
Why Understanding the Differences Between Employees and Contractors in Australia Matters
How a worker is classified — as an employee or a contractor — affects who pays tax, who provides superannuation and leave, and who bears legal responsibilities.
Misclassification can result in penalties, back pay, unpaid super, and potential legal action. That’s why getting it right from the beginning is crucial.
Key Differences Between Employees and Contractors in Australia
The key difference is whether the worker is integrated into the business or operates independently. Contracts matter, but it’s the legal rights and obligations in the agreement — not day-to-day work habits — that carry the most weight.
| Factor | Employee | Contractor |
|---|---|---|
| Control | Business decides how/when work is done | Worker decides how/when work is done |
| Integration | Part of the business | Independent business |
| Payment | Hourly/commission | Paid per project/outcome |
| Subcontracting | Cannot delegate | Can subcontract or delegate |
| Tools | Provided by business | Supplied by contractor |
| Risk | Business bears financial risk | Contractor bears commercial risk |
| Goodwill | Business benefits | Contractor’s own business benefits |
Superannuation and the Differences Between Employees and Contractors
Even if someone is considered a contractor, they might still be entitled to super if:
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They are paid mainly for their labour
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They work in performance, entertainment, or domestic roles
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They perform domestic work over 30 hours/week
Tip: If in doubt, it’s your responsibility as a business owner to review whether super applies.
Workers Who Are Always Employees
Certain categories of workers are always employees under law — no matter the contract wording:
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Apprentices
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Trainees
-
Labourers
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Trades assistants
They usually work under formal training agreements and are covered by award rates. Tax and super rules apply just as they do for other employees.
Companies, Trusts, and Partnerships as Contractors
Hiring a company, trust, or partnership? It’s always a contracting arrangement. However, individuals working under those entities may still be employees — of that entity.
Understanding this distinction helps ensure correct tax treatment and avoids confusion during audits.
Why Getting This Right Matters
For workers, correct classification means receiving proper entitlements. For businesses, it prevents exposure to penalties, unpaid super, and compliance breaches.
If you’re unsure about a worker’s status, it’s best to check early. A simple review now can avoid expensive errors later.
WL Advisory is a Chartered Accounting firm. We specialise in accounting, tax, and advisory services for individuals and small businesses. Please visit our website for more information. Employees vs. Contractors
Read more from the ATO here:
ATO – Employee or Contractor