Contractor or employee? The ATO and Fair Work tests, super for contractors, and what goes wrong
Most sole traders meet this question from one of two sides. Either a business wants you on an ABN and you wonder whether you are really an employee, or you are the business and the subbie who has worked for you three days a week for two years is starting to look like staff. An ABN, an invoice and a signed "independent contractor agreement" do not settle it. The ATO and Fair Work apply different tests, and the cost of getting it wrong lands almost entirely on the payer.
Updated 28 September 2026. General information only, not tax advice.
The ATO test for tax and super
Following two High Court decisions in 2022, the ATO looks at the legal rights and obligations in the contract where there is a comprehensive written one, and at the conduct of the parties where there is not. No single factor decides it:
- Control. Can the business direct how, when and where the work is done, or only what result it wants?
- Delegation. Can you send someone else, at your own cost? A real right to delegate is a strong sign of a contractor.
- Tools and equipment. Do you bring your own significant tools and vehicle, or use theirs?
- Risk. Do you carry the cost of defects and rework, and hold your own insurance?
- Basis of pay. A quoted price for a result points to a contractor. An hourly or daily rate points toward employment.
The ATO has an employee or contractor decision tool on its website. Use it, save the result and keep it with the contract.
The Fair Work test for pay and conditions
Since 26 August 2024 the Fair Work Act looks at the real substance, practical reality and true nature of the relationship, including how the work is actually performed, not only the written terms. A contract that reads like a contractor agreement while the person works fixed hours under supervision, cannot refuse work and has been there for years can be employment under Fair Work. The exception is a contractor earning above the contractor high income threshold, who can give a written opt-out notice; check Fair Work for the current threshold.
A business cannot make an employee a contractor by asking them to get an ABN. Doing so knowingly is sham contracting, and the defence is now that the business reasonably believed the person was a contractor.
Super: the rule that catches everyone
Even where a worker is a genuine contractor for every other purpose, the superannuation law treats a person who works under a contract that is wholly or principally for their labour as an employee for super. Three conditions: the payment is mainly for their personal labour and skills rather than for a result or for materials, they must do the work themselves and cannot delegate, and the contract is with them personally rather than their company or trust. When all three are met, the payer owes super guarantee on the labour part of every invoice, on top of the invoice.
Missed, it becomes the super guarantee charge, which is not deductible and carries interest and an administration fee. For a sole trader on an ABN, it means a long-running labour-only engagement may be owed super. Your own contributions are a separate matter; see sole trader super contributions.
If you are the one on the ABN
You can be a genuine contractor with one main client, but the more the arrangement looks like a job, the more you should weigh what you are giving up: paid leave, sick leave, super, workers compensation, notice, unfair dismissal protection. Keep your own insurance, quote for outcomes and take other clients where you can. The personal services income rules are a separate tax question with their own 80% test; they do not make you a contractor or an employee.
If you are the one paying
Before the first invoice from a new subbie:
- Run the ATO decision tool and keep the result.
- Check their ABN on ABN Lookup. If a supplier does not quote an ABN on an invoice over $75, you must withhold 47% and send it to the ATO.
- Decide the super question. If the contract is mainly for their labour and they cannot delegate, budget super guarantee on top of their rate and pay it to their fund on the same timetable as your employees.
- Check workers compensation; in most states a labour-only contractor is a deemed worker.
- In building and construction, cleaning, courier and road freight, IT or security, their payments go in your TPAR each August.
If the true answer is that they are an employee, put them on properly. Hiring your first employee covers the setup.
How FlowFi helps
FlowFi categorises subcontractor payments as they appear on your bank statement and keeps the payee on each line, so the running total per contractor is visible all year for the super check, the TPAR and the conversation with your accountant. FlowFi does not decide who is an employee; it makes sure the numbers behind that judgement are in one place.
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Frequently asked questions
I have worked for the same company on an ABN for three years, five days a week. Am I an employee?
Possibly, under either test. Fixed hours, supervision, their equipment and no ability to send someone else all point to employment, and you are likely owed super under the labour-only rule whatever the answer. Talk to Fair Work or a lawyer before raising it.
Can I avoid all this by asking my subbie to invoice through their own company?
Contracting with a company takes the arrangement outside the labour-only super rule and changes the Fair Work analysis, but both the ATO and Fair Work look through arrangements set up to disguise employment, and requiring someone to incorporate so you can avoid entitlements is sham contracting territory.
Does paying super to a contractor mean I have to withhold tax from their invoices too?
No. Super and PAYG withholding are decided separately. If they quote an ABN and are a contractor for PAYG purposes, you pay the invoice in full and pay super to their fund on top. You only withhold if they have not quoted an ABN.
General information only, not tax advice. Check your own situation with a registered tax agent or the ATO.
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