You have found someone to do the work, agreed on a price, and they have handed you an ABN and an invoice. Done — they are a contractor, right? Not necessarily. Whether a worker is an employee or a contractor is one of the easiest things for a business to get wrong, and one of the most expensive to fix later. A label on a piece of paper does not settle the question. What matters is the real nature of the working relationship, looked at as a whole.
Why this is not just paperwork
The classification drives a set of obligations that follow the relationship whether you have noticed them or not:
- Super Guarantee — employees are generally entitled to super on their ordinary earnings (the SG rate is 12% for 2025–26).
- PAYG withholding — you generally withhold tax from an employee's pay and remit it to the ATO.
- Leave, and other entitlements — employees may be entitled to leave and other workplace conditions that contractors are not.
If you have treated someone as a contractor when they were really an employee, those obligations do not disappear. You can be liable for unpaid super, interest charges and penalties, plus the tax you should have withheld. The ATO can look back over past years, so a small misjudgement can compound into a large bill.
It is about the whole relationship
You cannot decide the question simply by writing "contractor" on an agreement or paying against an invoice. An ABN does not make someone a contractor any more than the absence of one makes them an employee. The test looks at how the arrangement actually works in practice — the substance, not the label.
The High Court has placed real weight on the terms of the written contract between the parties. Where there is a comprehensive, genuine written agreement, the rights and obligations it sets out are central to working out the relationship. That makes a well-drafted contract more important than ever — but it also means a contract that does not reflect reality will not save you.
Things that point one way or the other
No single factor is decisive. You weigh the whole picture. Indicators that tend to point toward a contractor relationship include:
- Delegation — the worker can genuinely subcontract or delegate the work to someone else, rather than having to do it personally.
- Control — the worker decides how and when the work is done, rather than being directed by you.
- Commercial risk — the worker bears the risk of profit or loss, fixes defects at their own cost, and may carry their own insurance.
- Tools and equipment — the worker provides their own significant tools and assets.
- Running their own business — the worker is genuinely operating a business of their own, often serving several clients, rather than working in yours.
Where the worker must do the job personally, works set hours under your direction, uses your equipment and effectively forms part of your business, the indicators point toward employment — whatever the paperwork says.
Super can be owed even for some contractors
Here is the trap that catches many businesses. Even where a worker is genuinely a contractor for most purposes, they can still be treated as an employee for Super Guarantee. If you engage someone under a contract that is wholly or principally for their labour, you may owe SG on top of what you pay them, even though they invoice you with an ABN.
So "they are a contractor" does not automatically mean "no super". If the arrangement is mainly about that person's labour, check whether SG applies before you assume it does not.
Sham contracting is illegal
It is unlawful to disguise an employment relationship as a contracting one — known as "sham contracting". That includes telling an employee they must get an ABN and invoice you in order to keep their job, when the relationship is really employment. This is taken seriously and carries its own penalties, separate from any tax shortfall. Getting the classification right is not only about avoiding back-payments; it is about staying on the right side of the law.
What to do if you are unsure
Review each working arrangement on its own facts rather than assuming the last one sets the pattern. A few practical steps:
- Look at how the relationship actually operates, not just what the agreement is called.
- Put the genuine terms in a clear written contract — and make sure day-to-day practice matches it.
- Where the worker is engaged mainly for their labour, check whether SG applies regardless of the contractor label.
- When an arrangement sits in the grey area, get advice before you set it up, not after a review finds a problem.
From 1 July 2026, Payday Super is scheduled to begin, which will require super to be paid alongside wages — making it even more important to have classifications right and super flowing correctly from the start.
If you would like help reviewing your workers, we can walk through each arrangement with you and flag where the risk sits. Book a chat at nebulaaccounting.au or call 0433 822 227.
This article is general information only and does not take account of your personal circumstances — it is not personal tax, financial or legal advice. Tax laws change and apply differently to different people. Nebula Accounting Pty Ltd is a registered tax agent (No. 26259377); please speak with us or check with the ATO before acting.