Independent Contractor vs Employee: The Australian Tests

What it is

The question of whether a worker is an employee or an independent contractor decides who pays super, who withholds PAYG, who owes workers compensation, who is exposed under the Fair Work Act and who carries payroll tax. For residential builders it is one of the most expensive labels to get wrong.

There is no single statutory definition. Different statutes use slightly different tests, and the common law adds another layer. A worker can be a contractor for one purpose and an employee for another, which is why payroll, tax and HR rules need to be looked at together rather than as a single yes or no.

The common law test after Personnel Contracting

For most of the past forty years Australian courts used a "multi-factorial" test that weighed control, integration, the right to delegate, mode of payment, provision of tools and many other indicators. In 2022 the High Court reset the approach in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and the companion case ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

The Court held that where parties have committed the terms of the relationship to a written contract, and that contract is not a sham, characterisation is determined by the rights and obligations created by the contract rather than the post-contractual conduct of the parties. The label the parties chose is still not decisive, but the substantive contractual rights are.

What still matters under Personnel Contracting

The factors that count have not been thrown out. They are simply read out of the contract rather than the worksite. Courts still look at:

• the right of control over how and when work is performed
• whether the worker is obliged to perform the work personally or can subcontract
• whether the worker carries commercial risk
• whether the worker can profit from sound management of their own business
• ownership of tools and provision of materials
• exclusivity of service

In Personnel Contracting a backpacker engaged on a written "self-employed contractor" agreement was held to be an employee because the contract gave the labour-hire company the right to direct him to any client site and the right to control the work. In Jamsek two truck drivers who owned their trucks, contracted through partnerships and bore commercial risk were held to be contractors despite working exclusively for the same business for nearly forty years.

The Fair Work Act statutory test

The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 inserted a new section 15AA into the Fair Work Act 2009. From 26 August 2024 the question for Fair Work Act purposes is the "real substance, practical reality and true nature" of the relationship, looking at the totality of the relationship including how the contract is performed in practice.

Section 15AA effectively brings the pre-Personnel Contracting multi-factor approach back for Fair Work Act matters, while the common law contract-focused approach from Personnel Contracting still governs other statutes like the Superannuation Guarantee (Administration) Act 1992.

Workers earning above a high-income contractor threshold can opt out of section 15AA. Builders engaging skilled subcontractors above that threshold should keep written opt-out notices.

The ATO and superannuation

The ATO applies the common law contract test for income tax PAYG withholding. For superannuation the position is wider. Section 12(3) of the Superannuation Guarantee (Administration) Act 1992 deems a person who works under a contract that is wholly or principally for their labour to be an employee for super purposes, even if they are a common law contractor.

That means a subcontractor invoicing under an ABN can still trigger a super guarantee obligation if their contract is principally for their personal labour, they have limited right to delegate and they are paid primarily for hours worked.

Payroll tax and workers compensation

State payroll tax acts contain "relevant contract" provisions that pick up payments to contractors and treat them as taxable wages unless an exemption applies. The exemptions usually relate to contractors who work fewer than 90 days a year for the principal, who supply services to the public generally, or who hire two or more workers themselves.

State workers compensation schemes contain their own "deemed worker" rules that often pull in subcontractors who personally perform the work. A residential builder can have the same person classified as a contractor for ATO purposes, an employee under the Fair Work Act and a deemed worker for workers compensation. The labels do not have to line up across statutes.