Employee vs contractor – where businesses go wrong

You cannot decide whether someone is an employee or a contractor based on what you call them or how you pay them.

The classification depends on how the working relationship operates in practice.

The key distinction

Likely an employee if the person:

• works under your direction
• follows your hours or schedule
• is integrated into your daily operations

Likely a contractor if the person:

• controls how and when the work is done
• is engaged to deliver a specific outcome
• operates independently

Where businesses get it wrong

Most issues come from how the arrangement is set up in practice. Common situations include:

• engaging contractors for ongoing, core business activities
• working with the same contractor in a full-time capacity
• setting fixed hours and supervising their work closely
• moving employees into contractor arrangements without changing how the role operates

In these cases, the arrangement may be treated as employment.

What it leads to

If a working arrangement is reclassified as employment, the business may be required to:

• pay superannuation
• meet PAYG withholding obligations
• cover employee entitlements
• address any underpayments

Penalties may also apply. For example:

• using contractors for core business activities may attract penalties of up to $18,780 for individuals
• converting employees to contractors without genuine change may result in penalties of up to $90,000 for small businesses
• long-term contractor arrangements may lead to liability for back pay and entitlements
• treating contractors like employees can also result in legal costs and reputational impact

Areas often misunderstood

Even where someone is treated as a contractor, superannuation may still be payable — particularly where they are engaged primarily for their labour. This is often overlooked.

Practical approach

Before engaging a contractor, consider:

• Is the role ongoing or project-based?
• Who controls how the work is done?
• Is the person operating independently?

If the arrangement does not clearly reflect a contractor relationship, it should be reviewed before proceeding.

Final thought

This is a structural decision. It should be assessed based on how the work is performed — not on labels or payment method.