Contractor vs Employee

When hiring workers, it is critical to correctly classify a worker as an employee or contractor. If an employer classifies them incorrectly, they may face fines and penalties. However, classifying workers is not as simple as one may think as there are multiple factors to consider when determining whether a worker should be classified as an employee or as a contractor. An employer should learn the difference between the two and determine which type of employment arrangement is the best for their business.

What is the difference between an employee and a contractor?

An employee is an individual who works under the supervision of an employer as a representative of their business receiving in return wages or other remuneration. While an employee might have some freedom such as flexible hours, the employer has the right to manage and direct them.

On the other hand, a contractor is an individual who provides services to a business and who is not an employee of that business. They are the ones who make their own work arrangements and run their own business. Even though the employer specifies the results of their work, they have more control over how the work is done.

This may sound simple, but it quickly becomes quite complicated. Although some people may believe that having an ABN is sufficient to classify someone as a contractor, the information below shows that there is much more to it than that.

Summary of TR 2023/4


The concept of ’employee’ within the Taxation Administration Act 1953 (TAA) remains undefined, prompting the need for a comprehensive understanding of the term’s ordinary meaning. This ruling clarifies in the Australian legal framework that the determination of whether a worker is an employee involves an objective assessment of the overall relationship between the engaging entity and the worker. The ruling sheds light on the significance of contractual interpretation, emphasising that the contract’s terms, at the time of entry, are pivotal in establishing the nature of the employment relationship.

Contractual Interpretation and Legal Rights

The ruling underscores the importance of interpreting the contract of employment in accordance with established principles of contractual interpretation. Crucially, this analysis occurs at the time of contract formation, and external events or circumstances known to both parties may be considered to identify the contract’s purpose or object. However, when the terms of the contract remain unchallenged, evidence of subsequent conduct and work practices is deemed irrelevant in determining the legal relationship between the parties.

Exceptions to the Rule

While the ruling emphasises the sanctity of the written contract, exceptions exist. Evidence of contract performance may be admissible under general contract law principles, allowing parties to establish the contract’s formation, identify oral terms, demonstrate subsequent agreement variations, challenge the contract’s validity, or establish legal, equitable, or statutory rights or remedies. This nuanced approach ensures a fair assessment of the contractual relationship while preserving the integrity of the written agreement.

Establishing Employment Status

The ruling provides guidance on establishing whether a worker is an employee of an engaging entity by focusing on the worker’s role within the engaging entity’s business to determine whether the worker is working in the engaging entity’s business.

Unlike a checklist approach, the analysis requires a holistic consideration of the contract terms. The importance of qualitative appreciation and recognizing the varying importance of details in different situations is emphasised. The ruling discourages relying solely on labels used to describe the relationship, asserting that it is the legal rights and obligations that define the relationship.

Independence and Business Structure

Addressing a common misconception, the ruling clarifies that a worker conducting their own business, even with an Australian business number, does not automatically preclude them from being considered an employee in the business of another. This distinction is crucial in recognizing the complexity of modern work arrangements and the coexistence of independent business activities and employment relationships.

Irrelevance of Labels

The ruling dismisses the significance of labels chosen by parties to describe their relationship, emphasising that the characterization of the relationship hinges on the legal rights and obligations it entails. Labels inconsistent with these rights and duties hold no relevance, highlighting the importance of delving into the substance of the contractual relationship rather than relying on superficial descriptions.

Non Employment Relationships

The ruling stipulates that arrangements structured as payments for services other than employment, such as leases or bailments, do not establish an employment relationship for TAA purposes. This recognition of diverse business structures ensures that the taxation framework aligns with the intricacies of various commercial arrangements.


The ruling provides a comprehensive framework for determining employment status under the TAA, emphasising the ordinary meaning of ’employee’ and the crucial role of contractual interpretation. It underscores the need for a holistic assessment of the employment relationship, discouraging reliance on labels and emphasising the importance of legal rights and obligations.

Summary of TR 2023/4 Appendix

This is a summary of the appendix to the ruling, which explains issues in more detail. 

In the appendix, the focus is on Section 12-35 of the Taxation Administration Act 1953 (TAA), which mandates withholding amounts from payments made to an individual as an employee. The term ’employee’ is construed based on its ordinary meaning, and the appendix outlines the criteria for Section 12-35 to be applicable. 

The ordinary meaning of ’employee’ is pivotal, as Section 12-35 requires a payment to an individual as an employee, whether by the employer or another entity. The definition includes payments related to salary, wages, commission, bonuses, or allowances, provided these payments are made to an individual and as a consequence of their employment. 

Determining whether a worker is an employee or an independent contractor involves an examination of the totality of the relationship between the worker and the engaging entity as set out in the relevant contract. The distinction between a contract of service (employment) and a contract for services (independent contractor) is crucial and has been extensively considered in various legal contexts, such as income tax, industrial relations, and superannuation guarantee. 

The leading decision in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 underscores the importance of assessing the totality of the relationship by considering the legal rights and obligations that constitute the contractual relationship. The focus is on whether the worker is working in the business of the engaging entity, with various indicia of employment considered in light of these legal rights and obligations. 

Control over how, when, and where the worker performs their duties under the contract emerges as a key factor. The more control the engaging entity has, the more likely the worker is considered an employee. This control signifies the subservient and dependent nature of the work, reflecting the evolving landscape of skilled labour and reduced supervisory functions. 

The totality of the relationship is defined by the legal rights and obligations established in the contract, whether written, oral, or a combination of both. The process involves identifying the contract and determining its terms, considering even oral and implied terms. The High Court decision in Hollis exemplifies how written contracts may not comprehensively capture all terms, and evidence of performance becomes relevant. 

The characterisation of the relationship is solely based on the terms of the contract, irrespective of its form. The former multifactorial test is deemed inappropriate, emphasising the need to focus on the terms of the contract. Evidence surrounding the formation and performance of the contract may be considered to identify the contract’s object or purpose, establish variations, or demonstrate legal rights and remedies. 

The concept of a sham contract is introduced, defined as a contract not reflecting the true legal relationship between parties. It is applicable when both parties intend their relationship to differ from the written contract. In such cases, the characterisation of the relationship is based on the actual legal rights and obligations created by the parties. 

Variations, discharges, or waivers of contract terms can occur through express or implied agreement, impacting the relationship between the worker and the engaging entity. Equitable remedies, such as rectification or estoppel, may be considered based on the conduct of the parties, influencing the characterisation of the employment relationship. 

 Determining whether a relationship is one of employment   

The determination of an employment relationship hinges on the core distinction between an employee and an independent contractor. The former serves in the business of an employer, contributing to the business as an integral part, while the latter provides services to a principal’s business, pursuing their own business enterprise. The critical question is whether the worker is an employee of the engaging entity, and this assessment involves examining the terms of the contract and considering various employment indicia outlined in the ruling. 

Characterising the engaging entity’s business is crucial in establishing whether the worker is working in that business. The nature of the business, as exemplified in the Personnel Contracting case, is assessed in terms of the engaging entity’s core functions and assets, particularly the right to control the provision of labour. 

The dichotomy of working in one’s own business versus the employer’s business is recognised, but it is cautioned that focusing solely on this may overlook the totality of the relationship. The emphasis is on determining whether the work is so subordinate to the engaging entity’s business that it can be seen as performed as an employee rather than as part of an independent enterprise. 

The obligation for a worker to present as part of the engaging entity’s business is a significant factor. This requirement, as evidenced in the Hollis case, where bicycle couriers presented themselves as part of the employer’s business, can influence the characterisation of the employment relationship. However, a clear distinction is drawn between contractual obligation and voluntary adherence to business expectations. 

Control and the right to control are fundamental aspects in determining an employment relationship. The employer’s right to control how, where, and when the employee performs work is crucial. The significance lies in the existence of the contractual right to exercise control, indicating the subservient and dependent nature of the employment. The need for control is highlighted in businesses centred around the supply of labour or services. 

While an employer may not retain control over all aspects of work in every situation, the nature of control can vary based on the contractual arrangement. The right to terminate a worker’s contract or the requirement for indemnification in case of non-compliance with instructions are cited as examples of rights that confer a capacity to control. 

In summary, the test for determining an employment relationship involves evaluating whether the worker serves in the engaging entity’s business, considering factors like the character of the business, the worker’s presentation as part of the business, and the presence of control or the right to control in the contractual relationship.  

 Other Indicia for Determining Employment Relationship 

 Delegation, Subcontracting, or Assignment of Work 

  • An inherent feature of an employment relationship is personal service by the employee within the engaging entity’s business.  
  • The existence of an unfettered right for a worker to delegate, subcontract, or assign work to others is generally inconsistent with an employment relationship.  
  • A broad, legally exercisable right to delegate work, if not limited, is a strong indicator against an employee relationship.  
  • True delegation is distinguished from an employee’s task delegation to colleagues, and the ‘own business/employer’s business’ dichotomy is acknowledged. 

 Results Contracts 

  • Contracts focused on achieving a specified result indicate a service-oriented relationship rather than employment. Remuneration based on the achievement of specific outcomes, often a fixed sum on job completion, supports a service contract.  
  • Payment models based on discrete tasks may align with employment if tied to task completion or productivity.

Provision of Tools and Equipment  

  • The worker providing their tools may suggest an independent contractor, but the nature, scale, and cost of tools must be considered.  
  • The ownership of tools and equipment is significant, and the worker must bear substantial costs. Specialised or significant tools may point toward an independent contractor relationship. 


  • A worker bearing little or no risk of costs arising from their work is indicative of an employment relationship.   
  • A worker’s obligation to obtain insurance may lean toward an independent contractor relationship. 

Generation of Goodwill 

Contracts preventing a worker from generating goodwill for their own business may indicate an employee serving in the engaging entity’s business. 

Other Considerations: 

  • The labels given to parties in a contract do not determine the relationship’s character; the objective rights and duties in the contract are crucial.  
  • Obligations such as using a registered business name or providing invoices are operative terms and should be considered along with other indicators.  
  • Engaging through a non-individual entity may suggest a lack of a direct employment relationship, but direct contractual involvement may alter this conclusion.  
  • In specific cases, where the relationship involves a lease or bailment, payments may be for the use of property rather than services, as seen in taxi industry arrangements. 

Summary of contractor vs employee differences

Factor Employee Contractor
Control over how work is performed Performs work under the control of their employer. The work is being controlled by the employer including hours, work location and how work is done. Has a high level of control over the work they perform, including their hours, work location and how they do the work.
Exclusivity Usually works exclusively for the employer. Free to provide services to multiple clients.
Risk Faces no commercial or financial risk over their work as the employer is the one who bears the responsibility. Employers also have the obligations regarding the safety of their employees and will be responsible if there will be any injury that occurs during the course of their employment. Assume the risk of making and losing money as they will be responsible for any liability and defects that is why it is common for contractors to have their own insurance policies.
Tools and equipment Generally, performs work using tools and equipment provided by the employer (at employer’s place of work). An employee is generally reimbursed for expenses personally incurred by them to perform their work (as long as they are authorised by their employer). Typically provides their own tools and equipment and they are not usually reimbursed for expenses they incur in providing the services.
Ability to delegate or subcontract work Personally engaged to perform the work and has no right to delegate or subcontract the work to another person unless authorised by the employer. Can delegate all or some of the tasks to another person and may employ other persons to perform the work (although this can be subject to the agreement with the employer).
Hours of work Generally has a standard or set hours which are determined by the employer. It also applies to casuals even though their hours tend to vary every week. Can set their own hour of work as long as they are able to perform the task. An agreement may deem a certain amount of hours’ worth of work be completed but it is entirely at the discretion of the contractor for when these hours will take place.
Status of Business Part of the business and is working in the employer’s business. Own and run their own business and their services are different from the employer’s business. The work performed is specified by a contract and it’s up to them to accept or reject additional work.
Expectation of work Can expect regular and systematic work. Usually hired for specific tasks and will not generally engage them for further work beyond this.
Method of Engagement Normally engaged personally through an interview process. Can be engaged through a trust, partnership or company.
Superannuation Entitled to have super contributions paid by their employer into their nominated super fund. Pays their own super but in some circumstances, contractors may be entitled to be paid super contributions (see below for more information).
Tax Withholding tax (PAYGW) deducted by their employer and then the latter remit it to the Australian Tax Office (ATO). Pays their own tax to the Australian Tax Office (ATO).
Leave Entitled to annual leave, long service leave and sick leave and this is usually provided by a written contract. Not entitled to leave and a written contractor agreement would not usually provide for these things.
Method of Payment Paid on a regular basis such as weekly, fortnightly, or monthly. They are paid for the time worked, a price per item or activity and commission. Will invoice the employer for work completed or is paid once the agreed work is finished. The amount that will be paid is determined by the result achieved as per the quote provided that is calculated based on an hourly rate or price per item.

When an employer must pay superannuation for contractors

An employer must pay superannuation for contractors who are deemed to be employees for superannuation purposes in some circumstances such as:

  • If the worker works under a contract that is wholly or principally for their labour.
  • If the worker performs work that is wholly or principally of a domestic nature for more than 30 hours per week.
  • A sportsperson, artist or entertainer who is paid to perform, present, or participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity.
  • A person paid to provide services in connection with any performance, presentation, or participation in these activities.
  • A person who is paid to perform services related to the making of a film, tape, disc, television, or radio broadcast.

What happens if an employer misclassifies an employee as a contractor?

It is critical for an employer to not misclassify a worker because there are differences between the entitlements an employer owes to employee versus contractor. Penalties and charges will apply if you misclassify an employee as a contractor.

Penalties and charges include:

  • Penalties for failing to meet the PAYG withholding requirements.
  • A super guarantee charge – which includes of super guarantee shortfall amounts (the amount of super contributions that should have been paid into a complying super fund), interest charges and administration fee.
  • Additional fines up to twice the amount of the super charge

What is sham contracting?

Sometimes an employer may tell a worker that they are an independent contractor, when in fact they are an employee of the business. If the employer knew that the worker was an employee, there may be a sham contracting arrangement.

A sham contracting arrangement is when an employer attempts to disguise an employment relationship as a contractor relationship. They may do this to avoid certain taxes and their responsibility for employee entitlements like superannuation and leaves.

Sham contracting is prohibited under the Fair Work Act 2009 and if the employer is found to have engaged in sham contracting, they will be required to compensate the employee for any unpaid entitlements plus interest.

What is the difference between an employment contract and a contractor agreement?

An employment contract is a contact between an employer and an employee that sets out the terms and conditions of the employment arrangement. This may be written, verbal, or a combination of the two. It is highly recommended that a written agreement is made in order to specify all the obligations of the employer.

A contractor’s agreement is a contract between an employer and the contractor who provides the service. This agreement sets out the services to be provided, the price for the services, dates, or timelines for the provision of the services and any other conditions or obligations between the employer and the contractor.

What are the pros and cons of hiring an employee vs a contractor?

Some employers may choose to hire a full-time employee for stability and availability while others may choose to hire a contractor due to flexibility and specialty. If an employer is unsure about which is the better option, the below pros and cons may help to decide which is more beneficial to the business.

Pros of hiring an employee

  • An employer can build a consistent team to work on projects when needed. It means that the employer does not have to continuously negotiate contracts with new talent and think about if they have the capabilities to complete the tasks that the employer hired them for.
  • Employees can be treated as long term investments because as the employer spend money on training them and developing their skill sets, they will understand the process within the company, and they will be more willing to put in extra effort which can be beneficial on the business in the long run.
  • Since an employer has more control over an employee, they can adjust an employee’s workload that best fit the needs of their business.

Cons of hiring an employee

  • It can be more expensive to have an employee as a worker for the business as the employer needs to invest in their staff, and this cost can quickly add up, especially if they need to purchase specialised equipment and tools.
  • It is always possible that an employer may hire someone that is not fit for the business. This may cause issues within the business that are hard and may take some time to be fixed.

Pros of hiring a contractor

  • It might be that the cost per hour is higher but the overall costs of hiring a contractor may work out to save you money because unlike an employee, an employer does not need to consider things like providing training, annual and personal leave, and purchasing the required tools and equipment.
  • Some businesses may need the flexibility to hire more workers during a busier period and this is where independent contractors can help ease the load.
  • The employer does not have to be as involved with the management process as the employer can just give the contractor a briefing and then let them get on with the job at hand. This saves them a lot of time to get on with other aspects of running their business.

Cons of hiring a contractor

  • A contractor can sometimes be working for multiple clients at the same time, so there is not always going to be the same kind of loyalty that an employer would experience with an employee.
  • Contractors have more flexibility when it comes to the hours they work, what jobs they accept/reject. This can sometimes make it difficult when it comes to communications and managing projects.

In determining whether to hire a contractor or an employee, it can be a crucial decision for the business to make as both have their pros and cons. Whether an employer decides to hire a contractor or an employee, it will be best if they hire someone that will be valuable and beneficial to their business.

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.