Are your contractors actually employees?

Introduction

Engaging a Contractor can provide businesses with access to specialist expertise, greater operational flexibility and the ability to manage fluctuating workloads without expanding their permanent workforce. However, these arrangements frequently evolve over time. A worker who is initially engaged as a Contractor may ultimately perform their role in a manner more consistent with employment. When that occurs, the legal characterisation of the relationship may become contentious.

Determining whether a worker is an employee or a Contractor has become increasingly significant following recent reforms to the Fair Work Act 2009 (Cth) (Act), which introduced a statutory framework alongside the existing common law principles. While other Australian legislation may adopt different statutory definitions or deeming provisions for their particular purposes, this article focuses on the common law and the statutory framework established by the Act.

What is the difference between an employee and a contractor?

At a broad level, the distinction is straightforward.

Employee	Contractor
An employee performs work on behalf of the employer as part of the employer’s business.1	A Contractor performs work on their own behalf as a business in its own right.2

Despite being straightforward, the distinction is significant because the classification of a worker as an employee or a Contractor may affect the legal rights, obligations and statutory regimes that apply to the relationship, including those relating to:

• minimum employment entitlements;
• taxation;
• superannuation;
• workplace protections; and
• unfair dismissal.

How do Australian Courts determine whether someone is an employee or contractor?

Australian law recognises two principal approaches to determining whether a worker is an employee or a Contractor:

• the common law test; and
• the statutory whole-of-relationship test under the Fair Work Act 2009 (Cth).

What is the common law test?

Under the common law, Australian Courts are required to determine whether a worker is an employee or an independent contractor by examining the legal rights and obligations created by the parties’ contract.³

Where the parties have comprehensively committed the terms of their relationship to a written contract, the inquiry is directed to the rights and obligations established by that contract.⁴ Consistent with ordinary principles of contractual interpretation, the Court must objectively assess those rights and obligations to determine whether they establish a relationship of employment or one of independent contracting.⁵

For questions arising outside the Fair Work Act 2009 (Cth), the applicable legislation should be considered to determine whether a statutory test or definition applies. Where no statute provides otherwise, the common law principles continue to govern the classification of the relationship.

What is the statutory test?

The statutory whole-of-relationship test was introduced by the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Cth), which inserted s 15AA into the Fair Work Act 2009 (Cth).

The amendment was enacted in response to the High Court’s decisions in CFMMEU v Personnel Contracting Pty Ltd and ZG Operations Australia Pty Ltd v Jamsek. Those decisions confirmed that, where the parties had comprehensively committed the terms of their relationship to a written contract, the common law inquiry was generally confined to the legal rights and obligations established by that contract.⁶

For the purposes of the Act, s 15AA modifies that approach by requiring the relationship to be assessed as a whole. The operative part of s 15AA(2) of the Act provides:

(2) For the purposes of ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person:

(a) the totality of the relationship between the individual and the person must be considered; and

(b) in considering the totality of the relationship between the individual and the person, regard must be had not only to the terms of the contract governing the relationship, but also to other factors relating to the totality of the relationship including, but not limited to, how the contract is performed in practice.⁷

In effect, s 15AA of the Act requires the Court to look beyond the parties’ contract and examine the relationship in its entirety. In doing so, the court must consider both the contractual rights and obligations of the parties and the practical reality of how the relationship is performed in totality.

Which test applies and when?

Section 15AA of the Act does not replace the common law test in all contexts. Rather, it applies only for the purposes of the Fair Work Act 2009 (Cth). Where the question of employment status arises outside that Act, the applicable test will depend on the governing legislation or, where no statutory test applies, the common law.

Additionally, s 15AB of the Act permits certain high-income Contractors to opt out of the statutory whole-of-relationship test. Where a valid opt-out notice has been given, the relationship is instead assessed under the common law.

Situation	Test that applies
Question arises under the Fair Work Act 2009 (Cth)	Statutory whole-of-relationship test (s 15AA)
Eligible high-income contractor has validly opted out under s 15AB	Common law test
Question arises outside the Fair Work Act 2009 (Cth)	Applicable statutory test (if any), otherwise the common law test

Accordingly, determining the correct legal test is the first step in assessing whether a worker is an employee or a Contractor.

What are the key indicators of an employee or contractor relationship?

Although the common law and statutory whole-of-relationship tests differ in their approach, many of the same indicators of the working relationship, including control, delegation, commercial risk and the method of payment, remain relevant when assessing the legal character of the relationship.⁸

While no single factor is determinative, businesses should consider the following key questions when engaging Contractors:

Control

Does the business have the right to control how, when and where the work is performed, or does the worker retain autonomy over the performance of the services?

Independence

Is the worker operating an independent business, including managing their own time, processes, risks and commercial arrangements?

Commercial risk

Is the worker responsible for delivering the contracted result and bearing the costs and risks of operating their business, or are those risks assumed by the engaging business?

Why does this matter for businesses?

Getting the distinction between an employee and Contractor wrong can create unexpected costs and compliance issues for a business.

Misclassifying a worker as a Contractor can expose a business to obligations it did not anticipate, including potential liability for unpaid superannuation, taxation obligations, leave entitlements and penalties.⁹

For growing businesses, these risks often increase as working relationships evolve over time. Regularly reviewing Contractor arrangements helps ensure they remain appropriately structured and compliant with the applicable legal framework.

What does this mean in practice?

Entering into a contract for services does not, by itself, create an independent contractor relationship. Ultimately, whether a worker is an employee or an independent contractor depends on the legal character of the relationship as determined under the applicable legal test.

For advice specific to your circumstances, consult a qualified Australian legal practitioner.