Contractor vs employee: the ATO and Fair Work tests

Is my subbie an employee? It's one of the most common questions in a trade business, and getting it wrong is expensive. Call someone a contractor when the law says they're an employee and you can owe super, PAYG withholding, leave entitlements and penalties. This guide covers how the ATO and the Fair Work Ombudsman tell the difference, what changed in 2024, and the one rule that catches most tradies out: super for contractors paid for their labour.

Contractor vs employee: two tests, not one

There isn't one national definition. The ATO decides employee or contractor for tax and super. The Fair Work Act decides it for pay rates, leave and unfair dismissal. They usually land in the same place, but they look at the relationship in slightly different ways, and the Fair Work Ombudsman says plainly that the 2024 Fair Work definition doesn't change the meaning of employee for tax, super or workers compensation.

Workers compensation is a third set of rules again, run by each state. Check with your state's scheme separately.

Contractor vs employee: the ATO view

Since two High Court decisions in 2022, the ATO looks at the legal rights and obligations in the contract between you and the worker. The key question is whether the worker serves in your business, as its representative, or provides services to your business while running their own. Calling them an "independent contractor" in the paperwork doesn't decide it.

The ATO weighs these signs, and no single one settles it:

Points to an employee	Points to a contractor
You have the right to control how, where and when they work	They choose how, where and when, subject to reasonable direction
Paid for time worked, per item or by commission	Paid to achieve a result, often a fixed price
Must do the work themselves	The contract lets them delegate or subcontract (a real right, not a sham clause)
You supply most of the tools, or reimburse them	They supply their own tools and equipment at their own cost
Your business carries the cost of fixing defects	They carry the commercial risk of fixing their own defects
The goodwill builds up in your business	The goodwill builds up in their business

Two rules are clear-cut on the ATO's page:

Apprentices, trainees, labourers and trades assistants are always employees. An offsider who carries gear, cleans up and works under your direction is not a contractor, whatever the paperwork says.
Companies, trusts and partnerships are always contractors for tax and super. If you engage a subbie's Pty Ltd, the people doing the work are not your employees for those purposes.

Contractor vs employee: the Fair Work changes from 26 August 2024

On 26 August 2024 a new definition of employment was added to the Fair Work Act. According to the Fair Work Ombudsman, it means looking at the real substance, practical reality and true nature of the relationship, including how the contract works in practice, not only what the contract says. This is called the whole of relationship test.

Who uses which test depends on how your business is set up:

A Pty Ltd company (a constitutionally covered business) generally uses the whole of relationship test.
A sole trader or partnership in NSW, Victoria, Queensland, South Australia or Tasmania is a state referred business and uses the start of relationship test instead.

Both tests still look at control, financial risk, tools and equipment, the right to delegate, hours of work and whether the work is expected to continue.

The contractor high income threshold

A contractor who earns more than the contractor high income threshold can opt out of the whole of relationship test by notifying the business they work for, and use the start of relationship test instead. The Fair Work Ombudsman says the threshold is $190,100 from 1 July 2026. Contractors over the threshold also can't use the Fair Work Commission's unfair contract terms process.

What about "employee-like" workers?

You may have read about employee-like workers. That category, part of the new regulated workers rules, covers people doing digital labour platform work, plus contractors in road transport. It isn't a new label for an ordinary subbie working for a trade business.

Super for contractors paid mainly for their labour

This is the rule that surprises most tradies. Even when a worker is a genuine contractor and quotes an ABN, the ATO says you must pay super guarantee for them if the contract is wholly or principally for their labour. You calculate it on the labour component of their invoice, at the same 12% rate as employees, regardless of how much they earn.

Signs a contract is mainly for labour include:

they're paid mostly for their personal labour and skills;
they do the work themselves rather than sending someone else; and
they're paid for hours worked rather than for a result.

The ATO's super page also notes that this applies only when the contract is directly with the individual. A contract with their company, trust or partnership doesn't create a super guarantee obligation for you. From 1 July 2026 these contractors come under Payday Super like everyone else, so the super has to reach their fund within 7 business days of each payment. Our guide to Payday Super covers the deadlines.

Sham contracting

Sham contracting is dressing up an employment relationship as a contractor arrangement. On 27 February 2024 the defence changed. An employer used to be able to argue they weren't reckless; now they have to prove they reasonably believed the worker was a contractor at the time. Employers who engage in sham contracting can be penalised, and as the ATO points out, the label you put in a contract doesn't decide what the relationship really is.

A quick sense check If the worker turns up when you tell them to, uses your gear, works only for you, can't send anyone else and is paid by the hour, treat it as employment unless a professional tells you otherwise. When in doubt, ask your accountant or an employment lawyer before the first pay run, not after.

How BizzMate helps

BizzMate isn't payroll software and it won't make this call for you. It does keep the records that matter when someone asks later. Subbies' bills are recorded against each job in supplier bills, with the amount, the GST and a copy of the bill, then marked paid. Jobs show who was assigned, and if you take on a first apprentice, our guide to what changes when you hire your first apprentice covers the rest. Try BizzMate free for 14 days.

This guide is general information, not legal or financial advice. Whether a worker is an employee depends on the full facts, so get advice from your accountant, an employment lawyer or the Fair Work Ombudsman for your situation.

Contractor or employee? How to tell for subbies and offsiders