Employee vs. Contractor: What is the Difference?

Updated: April 2026

Getting the classification of your workers wrong is one of the most costly mistakes a business owner can make. The ATO strictly monitors "sham contracting"—where a business treats a worker as an independent contractor to avoid paying entitlements like superannuation, leave, and payroll tax.

1. What makes someone an Employee?

An employee works in your business and is part of your business. Generally, a worker is an employee if they:

  • Perform work under the direction and control of the employer on an ongoing basis.
  • Work standard or set hours (even if they are casual).
  • Are paid for the time worked, a price per item, or a commission.
  • Have tax deducted from their pay by you (PAYG Withholding).
  • Use tools and equipment provided by you (or receive an allowance for using their own).
  • Are entitled to paid leave (sick leave, annual leave) unless they are casual.

2. What makes someone an Independent Contractor?

An independent contractor is running their own business and provides services to your business. Generally, a contractor:

  • Has a high level of control over how the work is done.
  • Is paid for a specific result achieved based on a quote they provided.
  • Provides their own tools and equipment.
  • Bears the commercial risk (e.g., they must fix defective work at their own expense).
  • Uses their own ABN, issues invoices, and manages their own taxes.
  • Can delegate or subcontract the work to someone else.

Worker Classification Quiz

Answer these 5 quick questions about your working relationship to estimate how the ATO might classify your worker.

1. Who has control over how the work is performed?

2. How is the worker paid?

3. Who provides the tools and equipment?

4. Can the worker delegate the work?

5. Who bears the commercial risk?

Waiting for Answers...

Please answer all 5 questions above to see the estimated classification.

3. The Superannuation Trap for Contractors

Superannuation Guarantee Warning

Just because a worker has an ABN and issues you invoices does NOT mean you are exempt from paying them Superannuation! Under Australian law, if you hire an individual contractor mainly for their personal labour and skills (rather than to achieve a specific result or provide equipment), you must still pay Superannuation Guarantee (SG) contributions on their behalf.

How to protect your business

It is not always black and white, and having a written contract that says "Independent Contractor" will not protect you if the actual working relationship looks like employment. If you are unsure how to classify a worker, or need help setting up your payroll correctly, contact the team at Loyal Bright Accountants.

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