You do not get to pick the label
This is the part that catches people. Whether someone is a contractor or an employee is not decided by what you call them, what they call themselves, or what the piece of paper says at the top. It is decided by what the working relationship actually looks like once it is running.
The cost of getting it wrong is back pay, unpaid leave, unpaid super, interest and a penalty. It is one of the most expensive mistakes a small business makes in its first two years, and it usually starts with a genuinely friendly arrangement where nobody meant any harm.
The multi-factor test, in plain words
Nobody scores this on a card. A court weighs the whole picture. These are the factors that carry the weight.
Control. Do you tell them how to do the work, or only what result you want? An employee is directed. A contractor is engaged for an outcome and decides the method.
Hours. Do you set the roster, or do they choose when they work? Someone who has to be at your workshop at seven every morning looks like an employee no matter what the agreement says.
Tools and equipment. Who supplies the ute, the laptop, the ladder, the software licence? A contractor generally brings their own and wears the cost of replacing them.
Ability to delegate. Can they send someone else in their place, at their own expense, without asking you? A real right of delegation is one of the strongest contractor indicators there is. If the answer is no, because you hired that person specifically, that points to employment.
Business risk. Who wears it when the job goes wrong? A contractor who has to fix a defect at their own cost, who carries their own public liability and who can make a loss on a fixed price is running a business. Someone paid an hourly rate regardless of outcome is not.
Integration. Do they wear your shirt, use your email address, appear on your website as part of the team, and get introduced as your staff? The more they look like part of your business to the outside world, the more they look like an employee.
What changed in 2024
For a couple of years after the High Court decisions in early 2022, the written contract did most of the work. If the terms on paper described a contractor relationship, that is largely how it was read.
That flipped on 26 August 2024. The Closing Loopholes amendments added a new definition to the Fair Work Act that asks you to look at the real substance, practical reality and true nature of the relationship, taking the whole relationship into account, not just the words in the contract.
In plain terms: a well drafted agreement still matters, but it no longer saves an arrangement that behaves like employment. If the paper says a contractor can delegate and in eighteen months they never once have, and you would have refused if they tried, the paper is not going to protect you.
There is also an opt-out pathway for higher earning contractors above a contractor high income threshold, and the Fair Work Commission can hear unfair contract term disputes for independent contractors. Check the current threshold on fairwork.gov.au before relying on it.
Sham contracting is a separate offence
Telling someone they have to get an ABN when the job is really employment is sham contracting, and it is prohibited under the Fair Work Act on its own. So is dismissing an employee and re-engaging the same person as a contractor to do the same work.
The defence used to be that you did not know and were not reckless about it. Since August 2024 the test is whether you reasonably believed the person was a contractor, which is harder to satisfy. Being sloppy is no longer a defence.
Penalties run into serious money per contravention and the maximums have been lifted more than once, so look up the current penalty unit value and multiplier on fairwork.gov.au rather than quoting an old figure at yourself.
Superannuation catches genuine contractors too
This one surprises people who did everything else right. Under the superannuation guarantee rules, if you engage someone under a contract that is wholly or principally for their labour, you owe them super even though they are a genuine contractor with an ABN and an invoice.
Wholly or principally for labour means you are paying for the person, not for a result they can deliver however they like. A bookkeeper you pay by the hour to do your books is usually caught. A landscaping company that quotes a fixed price for a job, supplies the plants and the machinery and sends whoever it likes, is usually not.
The rate and the payment timing both change over time, and super for employees now has to be paid in line with pay rather than quarterly. Check the current rate and rules on ato.gov.au, and if the contract is mostly labour, budget for super from the first invoice rather than finding out two years in.
An ABN proves nothing
Worth saying plainly because it is the single most common misunderstanding. An ABN is a registration number. Anyone can get one in fifteen minutes. It says nothing about the nature of the working relationship.
The same goes for an invoice, for the person telling you they want to be a contractor, and for a signed contract titled Independent Contractor Agreement. None of those settle the question. Only the six factors above, read against how the work is really done, settle it.
What to put in writing
Get the agreement right and then live by it. The document should cover the scope as an outcome rather than a set of hours, the fee and how it is invoiced, who supplies tools and equipment, the right to delegate and what it costs, insurance the contractor must carry including public liability and workers compensation where it applies, who owns the intellectual property in what they produce, confidentiality, how either side ends the arrangement, and whether super applies under the labour test.
Then keep the evidence. Their invoices on their letterhead, their certificate of currency, the time they sent a second person to finish a job. That folder is what you show if the arrangement is ever questioned.