What is the difference between an employee and an independent contractor in Australia? [2025 update]

What is the difference between an employee and an independent contractor?

Employees and contractors have different rights in Australia. Under Australian law, employees have a suite of protected rights including wages and superannuation, leave, notice of termination and redundancy pay. Misclassifying staff as independent contractors when they are in fact employees has serious consequences, including claims for underpayment of wages, entitlements and superannuation, sham contracting claims, and wage theft claims.

What is the legal test to determine if someone is an employee or an independent contractor in Australia?

The recent introduction of section 15AA of the Fair Work Act has mostly overridden two significant High Court decisions. Section 15AA directs us to look at the relationship.

Section 15AA directs us to look at the"real substance, practical reality and true nature of the relationship between the individual and the person".

We are directed to look at the terms of the contract and how the parties are operating in relatity. There is a long line of case law on factors to take into account, which are discussed below.

Factors

The factors indicative whether a person is an independent contractor or an employee are:

1. Degree of control over how work is performed. If they perform work under your direction, they are more likely to be an employee. Whereas a contractor is more likely to have a high level of control in determining how work is performed.
   

2. Hours of work: Employees generally work standard hours except casuals who can work on a variable casual basis. Whereas an independent contractor can decide their hours of work.
   

3. Expectation of work: Employees generally have an expectation of work and contractors are generally engaged to complete a specific task.
   

4. Risk: Employees bear no financial risk. Whereas an independent contractor is responsible for their own profitability and if something goes wrong, they are legally responsible for poor work or liability. Therefore, independent contractors often take out their own insurance.
   

5. Superannuation: Employees are entitled to superannuation payments. Generally, independent contractors are required to pay their own superannuation. There are some situations where independent contractors are entitled to superannuation payments.
   

6. Tools and equipment: Employers usually provide tools of the trade (such as ladders, computers, software and tools) or a tool allowance is provided. Whereas independent contractors are required to provide their own tools.
   

7. Tax: Employees have their income deducted by their employer. Whereas, independent contractors are responsible for allocating and paying their own tax.
   

8. Method of payment: Employees are usually paid regularly (weekly, fortnightly or monthly). Independent contractors send an invoice for payment.
   

9. Leave: Employees are entitled to leave, including sick leave, annual leave, personal/carers' leave, annual leave (and leave loading for casual employees). Whereas, Independent contractors do not receive paid leave.

Some things to know:

• No one factor is determinative.

• The whole of the circumstances are taken into account.

Sham Contracts Employers beware. Disguising an employment arrangement as an independent contractor relationship to avoid employee entitlements could be a sham contract. Likewise, it is illegal to terminate a person's employment in order to engage them as a contractor. There are very serious penalties and could entitle an employee to bring a general protections claim.

Other legal tests: Superannuation, Tax and Payroll

So far this article was from an employment law perspective. The tests for tax, superannuation and payroll are different. We will go through the tests below.

Superannuation

Even if a person is an independent contractor, the superannuation laws can deem the worker to be an employee for your superannuation obligations. The Superannuation Guarantee (Administration) Act 1992 (Cth) could deem a worker to be an employee:

If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract’ .

Payroll Tax

Most States and Territories of Australia deem payments to contractors to be 'taxable wages' and therefore subject to payroll tax, subject to some exemptions. Please note, Western Australia has very different legislation to the other States and Territories.

Summary The correct classification of your staff is important. Wrongly a person as an independent contractor when, in fact they are an employee can pose the following risks:

1. Superannuation may be owed.

2. Payroll tax plus penalties and interest may be owed to the Australian Tax Office.

3. Employee entitlements including Modern Award, Enterprise Agreement or minimum pay rates and penalties for breaches of the Fair Work Act and leave entitlements, including leave loading. Back pay and penalties could apply.

4. Employees are entitled to protections under the Fair Work Act including unfair dismissal and general protections.

For help with the classification of your workers or any other legal questions, please do not hesitate to contact Caroline Mense from our office on (03) 8691 3128 or book a time below.

Legal Enablers acts for employers and employees.

Citatons

[1] 15AA of the Fair Work Act 2009 (Cth).

[2] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; (2022) 275 CLR 165 (Personnel Contracting) and Jamsek v ZG Operations Pty Ltd [2022] HCA 2; (2022) 275 CRL 254 (Jamsek).