Contractor vs Employee

An employee works in someone else's business under a contract of service, while a contractor runs their own business and provides services under a contract for services. Employees get paid leave, public holidays, notice periods and payroll tax handled through PAYG withholding. Contractors invoice with an ABN, manage their own tax through PAYG instalments, and get no paid annual leave or personal leave. The distinction decides who carries the risk, who pays super, and who can claim what protections.

Critically, the label on the paperwork does not decide your status. Since 26 August 2024, the Fair Work Act requires a whole-of-relationship test that looks at the practical reality: who controls how the work is done, who supplies the tools, who bears profit and loss risk, and whether you can genuinely delegate the work. Sham contracting, where an employer dresses an employment relationship up as contracting to dodge entitlements, is prohibited and attracts civil penalties. Fair Work (fairwork.gov.au) can and does unwind these arrangements.

The whole-of-relationship test in the Fair Work Act weighs a bundle of factors together rather than any single one. The big one is control: does the payer dictate how, when and where the work is done. Then come equipment, risk and delegation: who supplies the tools, who wears the losses, and whether you can genuinely subcontract. An employee typically has none of that independence, while a genuine contractor has most of it.

The money mechanics differ sharply once status is set. An employee on a $95,000 salary has PAYG tax withheld every pay cycle. They also accrue four weeks of annual leave and ten days of personal leave, plus 12% super on ordinary time earnings. A contractor invoicing $95,000 through an ABN gets the gross amount, then funds their own tax instalments with the ATO (ato.gov.au), their own leave, their own insurance and their own downtime. Super is the sneaky exception: the ATO says contractors paid mainly for their personal labour, meaning labour is more than about half the contract value, are still owed super guarantee by the payer regardless of the ABN label.

Misclassification is not an abstract legal nicety; it moves tens of thousands of dollars between your pocket and your boss's. A worker labelled contractor but treated as an employee loses paid leave worth roughly 8% of wages, public holidays, redundancy rights and unfair dismissal protection. The employer saves on payroll tax, workers compensation premiums and leave accruals, which is precisely why sham contracting is banned. If a court recharacterises the relationship, the backpay bill lands on the employer, not you.

A colleague named Brent (yes, that Brent) took an IT support gig at $70 an hour, called himself a contractor, and spent zero dollars on tax planning. He had one client, used their laptop, worked their roster and could not send a mate in his place, which is employment wearing a fake moustache. Eighteen months later the ATO sent him a $14,200 bill for unpaid income tax because nobody had withheld anything, and his client owed him super on top. Brent's fake moustache cost him a very real panic.

The practical checklist is short. If you are genuinely contracting, price using the freelancer pay calculator and sanity-check your rate with the freelance rate calculator, because undercharging is the other misclassification. If you suspect you are an employee in contractor clothing, raise it with Fair Work, because the six-year backpay window rewards the curious.