Subcontractor or Employee?
Whether the person working for you is a contractor or an employee is a legal characterisation, not a label you get to choose. Here's what the question turns on, what it costs to get wrong, and who to ask.
Almost every growing trade business reaches the point of putting someone on an ABN — it's flexible, it's what everyone else seems to do, and it avoids the commitment of an employee. The problem is that whether someone is a contractor or an employee isn't settled by the ABN, the invoice, or the contract you both signed. It's a legal characterisation of the whole relationship, and it's decided by regulators and courts rather than by the parties. This guide explains what the distinction turns on, what happens when it's found the other way, and why this is one of the few things in running a trade business you genuinely should not work out for yourself.
Doing this job for a living? See job management in ServiceYak.
The label doesn't decide it
This is the single most important thing to understand, and it's where most trade businesses go wrong. None of the following, on their own or together, make someone a contractor:
- They have an ABN.
- They invoice you rather than being paid through payroll.
- You both agreed they'd be a subbie, and neither of you is unhappy about it.
- There's a written contract describing them as an independent contractor.
- That's how the industry does it, and everyone you know operates the same way.
Those things are consistent with a genuine contracting arrangement, and a genuine contractor will usually have all of them. But they don't create one. If the substance of the relationship is employment, the paperwork describing it as something else doesn't change the obligations that come with it — and misdescribing it deliberately carries penalties of its own.
What the question actually turns on
At its heart, the question is whether the person is working in your business, or running their own business and supplying services to yours. That sounds simple and is not, because it's answered by looking at the whole relationship — the terms actually agreed between you, and how the work is really carried out — rather than by any single feature of it.
A few things are worth knowing about the shape of that question before you form a view:
- It's decided on the totality of the arrangement. No one factor is decisive, and arrangements that look obvious from the inside are regularly characterised the other way.
- The law here has moved in recent years, including changes to how the terms of the contract and the practical reality are weighed against each other. Guidance you read a few years ago may no longer describe the current position.
- Different regimes can reach different answers. The definition that applies for workplace entitlements isn't necessarily the one that applies for superannuation, workers compensation or payroll tax. It is entirely possible to be a genuine contractor for one purpose and be treated as a worker or employee for another.
- Both the Fair Work Ombudsman and the ATO publish their own guidance, because they administer different parts of it — and your state workers compensation authority and state revenue office have their own definitions again.
You'll find checklists online that promise to tell you the answer. Treat them as background reading, not as a determination. The characterisation is a legal judgement about a specific relationship, and the businesses that get caught are almost never the ones that knew they were taking a risk — they're the ones who ran a checklist, liked the result, and stopped there.
Why it matters — what's actually at stake
If an arrangement you've run as contracting is later characterised as employment, the obligations don't start from the date of the finding. They apply to the period the person was working, and they come from several directions at once.
| Area | Who administers it |
|---|---|
| Award pay rates, leave, notice and other entitlements | Fair Work Ombudsman / Fair Work Commission |
| Sham contracting — misrepresenting employment as contracting | Fair Work Ombudsman, with penalties attached |
| Superannuation obligations, including for some contractors | The ATO |
| Withholding obligations on payments to workers | The ATO |
| Workers compensation cover and premiums | Your state or territory workers compensation authority |
| Payroll tax, where contractor payments can be caught | Your state or territory revenue office |
Two of those deserve calling out because they surprise people. First, superannuation can be payable for some contractors even where the arrangement is genuinely contracting — the rules for that sit with the ATO and are worth checking specifically. Second, workers compensation is the one that turns a paperwork problem into a catastrophe: if a subbie is injured on your site and it turns out they should have been covered as your worker, the cost of that claim can land on a business with no insurance behind it.
The exposure is cumulative and backdated, which is why this is treated as a serious risk rather than an administrative annoyance. A long-running arrangement that gets re-characterised is a much bigger number than the difference in cost would have been over the same period.
The arrangement that catches trade businesses
Genuine subcontracting is normal and legitimate in the trades — a specialist business, with its own clients, its own tools, its own insurance and its own risk, engaged to deliver a defined piece of work. That is not what gets challenged.
What gets challenged is the arrangement that started as subcontracting and quietly became something else. It usually looks like this: the same person, for years, working only for you. In your uniform, in your ute, on the roster you set, doing whatever you point them at that week, with you supplying the materials and carrying the risk on the job. Nobody set out to structure it that way. It drifted, one convenient step at a time, and neither party noticed the character of it had changed.
If you're reading that and recognising your own arrangement, the useful response isn't to start adjusting the surface details so it looks more like contracting. It's to get the arrangement properly characterised and then make it genuinely be whatever it is.
What to do about it
- Decide the substance first, then the paperwork. Work out what you actually need — a person integrated into your business, or a separate business delivering a defined scope. Structuring backwards from the label you'd prefer is exactly what gets picked up.
- Read the primary sources, not the summaries. The Fair Work Ombudsman covers the workplace-entitlements side and the ATO covers superannuation and withholding. Both publish current employer guidance, and both are free.
- Check the state-level definitions separately. Your workers compensation authority and your state revenue office apply their own tests. An arrangement can be fine federally and still be caught by one of these.
- Get advice on anything that isn't obvious. An accountant for the tax and superannuation side, an employment lawyer or adviser for the workplace side. For a long-running or high-value arrangement this is an hour or two of fees against an exposure measured in years.
- Review long-running arrangements. The risk grows quietly with time as the relationship changes shape. A subbie who's been with you three years deserves a look, even if it was clearly right at the start.
Whichever way an arrangement is characterised, the job record shouldn't depend on it. ServiceYak keeps the scope, the site notes, the photos and the time against the job itself — so what was agreed and what was done stays on one record whether your own crew or an outside business did the work.
Frequently asked questions
Can I just put someone on an ABN instead of employing them?
An ABN doesn't make someone a contractor. Whether a worker is an employee or a contractor is a legal characterisation of the whole relationship, and it's assessed by regulators and courts rather than agreed between the parties. If the substance is employment, the ABN and the invoices don't change the obligations. Check the Fair Work Ombudsman and ATO guidance and get advice before you set an arrangement up.
Does a written contract settle whether someone is a contractor?
No. The terms you've agreed matter, but they're weighed alongside how the relationship actually operates, and the law in this area has changed in recent years. A contract labelling someone an independent contractor doesn't determine the answer on its own — and misrepresenting employment as contracting carries its own penalties.
What happens if I get it wrong?
Exposure typically runs backwards over the period the person worked and can come from several directions at once — unpaid award entitlements and leave, superannuation, withholding obligations, workers compensation premiums and potentially payroll tax, plus penalties where sham contracting is involved. The workers compensation side is the most serious risk, because an uninsured injury claim can be far larger than the cost difference ever was.
Do I have to pay super for a subcontractor?
Sometimes. Superannuation obligations can extend to some contractors even where the arrangement is genuinely contracting, under rules administered by the ATO. It's a specific question with a specific answer for your arrangement — check the ATO's guidance and confirm it with your accountant rather than assuming an invoice means no super.
Who should I actually ask?
The Fair Work Ombudsman for workplace entitlements, the ATO for superannuation and withholding, your state workers compensation authority for cover, and your state revenue office for payroll tax. For anything long-running, high-value or not clear-cut, an employment adviser and your accountant are worth the fee — this is not a decision to make from a blog post, including this one.