Employee vs contractor characterisation — employer duties
From 26 August 2024 the Fair Work Act 2009 (Cth) requires the real substance, practical reality and true nature of the relationship to be considered when deciding whether a worker is an employee or contractor. Misclassification exposes businesses to underpayments, PAYG, super and sham contracting penalties. This guide sets out 10 core employer duties.
Coverage
Every business that engages workers in Australia — whether through contracts labelled as employment, independent contracting, labour hire or gig platforms. Directors and payroll officers share personal exposure for breaches.
Legal basis
Fair Work Act 2009 (Cth) ss 15AA, 357–359 (sham contracting and characterisation). Superannuation Guarantee (Administration) Act 1992 (Cth) s 12. Taxation Administration Act 1953 (Cth) sch 1 Part 2-5. State payroll tax Acts on relevant contractor provisions.
The obligations
Apply the statutory characterisation test
From 26 August 2024, determine the real substance, practical reality and true nature of the relationship by looking at the contract and conduct together, not the label in the document.
Do not misrepresent employment as contracting
Never represent an employment relationship as an independent contracting arrangement, or dismiss an employee to re-engage them as a contractor for the same work.
Treat many contractors as employees for SG
Pay Superannuation Guarantee for contractors engaged wholly or principally for their labour, even where they hold an ABN and issue invoices.
Withhold PAYG when appropriate
Withhold PAYG from payments to workers who are employees in substance, and from voluntary agreements with contractors under the Taxation Administration Act.
Check relevant contractor payroll tax rules
Review state payroll tax "relevant contractor" provisions — in most states, regular contractor payments are dutiable unless a statutory exemption applies.
Apply workers compensation correctly
Workers compensation premiums often apply to contractors deemed workers under state legislation — check the definition of "worker" in the applicable state or territory Act.
Offer higher-earning contractors the opt-out pathway
Where a contractor genuinely earns above the contractor high income threshold, manage the opt-out notice process under the Fair Work Act with care.
Provide the Casual Employment Information Statement when engaging casuals
If a worker is engaged as a casual employee, provide the Casual Employment Information Statement before or as soon as possible after starting.
Keep complete engagement records
Keep signed contracts, scopes of work, invoices and evidence of independence (insurance, multiple clients, own equipment) for at least seven years.
Review classifications regularly
Review each worker classification annually and whenever scope, integration, control or payment terms change, documenting the outcome.
What happens if you do not comply
Sham contracting and underpayment contraventions under the Fair Work Act can attract civil penalties of up to $93,900 per contravention for bodies corporate, plus back-pay, superannuation shortfalls and interest. From 1 January 2025 intentional wage theft is a criminal offence under Part 3-1A.
Reporting requirements
No standalone contractor register, but businesses must report contractor payments in some industries via the Taxable Payments Annual Report, declare relevant contractor payments for payroll tax, and respond to Fair Work Ombudsman and ATO notices.
What firms should do today
- Maintain a written characterisation checklist that reflects the post-2024 statutory test
- Keep signed contracts for every engagement with a current scope of work
- Review SG and payroll tax treatment of contractors each year
- Flag long-term sole contractors for periodic classification review
- Train hiring managers on the prohibition on sham contracting
Compliance with Quillio
Quillio reviews consultant and contractor agreements to flag clauses likely to cross into employment — integration, control, exclusivity, tools and leave — before they become a Fair Work, SG or payroll tax problem. See /resources/security.
This guide is general information about employee and contractor characterisation in Australia — not legal advice. Classification is fact-specific and should be confirmed with a lawyer and registered tax agent.
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