EOR.net.au
The test looks at reality, not labels
Since 26 August 2024 the Fair Work Act requires the employee or contractor question to be answered by looking at the real substance, practical reality and true nature of the relationship, including how it works in practice and not only what the contract says. Tax and superannuation law use their own tests, so a worker can be treated differently for different purposes.
Signs of employment
Points towards employee
- You control how, when and where the work is done
- They must do the work personally and cannot send someone else
- They are paid for time worked rather than a result
- You supply the tools, equipment and systems
- They work only or mainly for you, as part of your team
- They carry no real commercial risk
Points towards contractor
- They run their own business with other clients
- They can delegate or subcontract the work
- They are paid for a defined result or project
- They supply their own tools and bear their own costs
- They can make a profit or a loss
- They control their methods and hours
No single factor decides the question. A long-term, full-time "contractor" who sits in your team, uses your laptop, attends your meetings and invoices a fixed amount every month looks a lot like an employee.
What sham contracting is
Sham contracting is when an employer tries to disguise an employment relationship as an independent contracting arrangement. Under the Fair Work Act it is unlawful to misrepresent employment as contracting, to dismiss an employee in order to re-engage them as a contractor, or to make false statements to persuade someone to become a contractor. Penalties can apply to the business and to individuals involved.
Super applies to some contractors
Even a genuine contractor can be entitled to the Superannuation Guarantee. If someone is paid mainly for their labour under a contract that is wholly or principally for that labour, they may be an employee for super purposes. The ATO has an employee or contractor decision tool to help work this out.
The cost of getting it wrong
- Back payment of minimum wages, overtime, penalty rates and leave.
- Unpaid Superannuation Guarantee, plus the super guarantee charge and interest.
- Unpaid PAYG withholding, payroll tax and workers' compensation premiums.
- Civil penalties under the Fair Work Act and, for intentional underpayment, possible criminal liability under the wage theft offence that started on 1 January 2025.
Where an EOR fits
If a worker really functions as part of your team, an EOR lets you employ them properly without setting up an Australian entity. They get the protections of employment and you remove the misclassification risk going forward. For overseas companies with an Australian "contractor", this is often the main reason to use an EOR.
Quick self-check
- Has the person worked for you for more than a few months with no end date?
- Do they work set hours or attend regular team meetings?
- Do they use your equipment, email address or systems?
- Do they have few or no other clients?
- Are they paid a fixed amount regardless of results?
If you answered yes to several, get advice and consider moving them onto an employment contract.
Frequently asked questions
Does having an ABN make someone a contractor?
No. An ABN is a tax registration. It says nothing about the real nature of the working relationship.
What about high earners?
Since 26 August 2024 some higher-income workers can opt out of the new "real substance" test if they earn above the contractor high income threshold and choose to have the written contract decide. This is limited and needs careful handling.
