TL;DR: A contractor should be an employee if, in practice, they work in your business rather than running their own. Since 26 August 2024, the Fair Work Act asks about the real substance, practical reality, and true nature of the whole relationship, not just the contract. Control, financial risk, tools, delegation, hours, and ongoing work all count.

Last updated 11 October 2026.

Key takeaways

• According to the Fair Work Ombudsman, constitutionally covered businesses have used the whole of relationship test since 26 August 2024. It looks at how a contract is performed in practice.
• No single factor decides the answer. The Fair Work Ombudsman weighs control, financial risk, tools, delegation, hours, and the expectation of ongoing work.
• An ABN or a habit of issuing invoices does not make someone a contractor, according to the Fair Work Ombudsman.
• A contractor paid mainly for their labour can be an employee for super guarantee purposes, according to the ATO, even when they are a genuine contractor elsewhere.
• Workers earning above the contractor high income threshold, $190,100 from 1 July 2026, can opt out of the whole of relationship test in writing.

How do you know if a contractor should be an employee?

The simplest test is whose business the work belongs to. An employee works in your business as a representative of it, whereas an independent contractor runs their own business and provides services to yours. If the person looks, works, and is managed like your staff, they may legally be an employee, whatever the contract says.

That way of thinking still holds, but the law around it has tightened. In August 2024, Australian employment laws changed the definition of employment under the Fair Work Act. As a result, some businesses have had to move a portion of their contractors over to employment to remain compliant.

For a mid-sized organisation, the risk usually sits in long-running arrangements. A contractor engaged for a three-month project is still there three years later, working set hours, using a company laptop, and managing two staff. On paper they invoice monthly, while in practice they look like a team leader.

So the question is less about the paperwork and more about the working reality. The Fair Work Act now answers it one way, while super, tax, and workers compensation still answer it another.

What changed on 26 August 2024?

From 26 August 2024, section 15AA of the Fair Work Act requires the real substance, practical reality, and true nature of the relationship to be assessed. According to the Fair Work Ombudsman, that means considering the terms of the contract and how the contract is performed in practice. This is the whole of relationship test.

Before that date, the common law approach looked mainly at the legal rights and obligations in the written contract. How the relationship worked in practice was largely beside the point. The Closing Loopholes changes reversed that for Fair Work Act purposes, so practice now carries real weight.

The new test applies to constitutionally covered businesses, which the Fair Work Ombudsman says usually means a company with Pty Ltd or Ltd in its name. By contrast, state referred businesses, such as sole traders and partnerships in most states, keep the start of relationship test. Work performed before 26 August 2024 is also assessed under the older start of relationship test.

Can a high earning contractor opt out of the new test?

Yes. The contractor high income threshold is $190,100 from 1 July 2026. According to the Fair Work Ombudsman, a worker earning more than that can give a written notice opting out of the whole of relationship test. The start of relationship test then applies. The business may prompt this in writing, and the worker then has 21 days to respond.

What are the 6 ways to determine if a person should be an independent contractor or an employee?

There are six main indicia, and the Fair Work Ombudsman’s own list of factors overlaps closely with them. They cover control over how, when, and where work is done, the ability to subcontract, and who supplies the tools. The rest are integration into the business, how the person is paid, and who carries the risk. It is a weighing exercise, not a checklist.

How, when and where the work is done

Employers direct and control how, when, and where their employees do their work. Independent contractors, by contrast, decide how, when, and where they do theirs. A worker whose manager sets their roster, location, and method looks like an employee.

Option to subcontract

Employees have to do the work themselves and cannot subcontract it to others. Independent contractors can usually delegate or subcontract the work to another person or business. If the contract allows substitution but nobody has ever used it, the whole of relationship test will notice.

Supply of tools and equipment

Employers provide the tools and equipment needed to do the job, or they reimburse the employee or pay an allowance. Independent contractors generally supply their own. According to the Fair Work Ombudsman, an auditor bringing their own computer is a typical contracting example.

Business integration and ongoing work

Employees are integrated into their employer’s business and work as a representative of it. They also usually have an ongoing expectation of work. Independent contractors provide services as part of running their own business and are usually engaged for a specific task.

Remuneration and hours

Employees are paid for time worked, per item or activity, or on commission, and they usually work standard or set hours. Independent contractors are often engaged to achieve a particular result, and they decide what hours a task needs.

Risk and liabilities

Employers carry the commercial risk for injuries or defective work. Independent contractors, on the other hand, carry the risk of profit or loss on each job and are usually liable for poor work. According to the Fair Work Ombudsman, contractors generally hold their own insurance.

How should a mix of indicia be decided?

Usually there will be a mixture of indicia, so an employer should examine all of them and decide on the whole picture. That is how the courts approach it too. According to the Fair Work Ombudsman, there usually will not be one deciding factor. Nor is a worker automatically one or the other because of the type of work they do.

Take a marketing specialist who works from home, sets their own hours, and uses their own equipment. However, they bill only your business, attend every team meeting, and report to your marketing manager. Some factors point one way, while others point the other, so the deciding question is the practical reality across the whole relationship.

Changes over time matter as well. The Fair Work Ombudsman warns that changing how work is performed can change the outcome under the whole of relationship test. As a result, a contract that was sound at the start can drift into employment without anyone signing anything new.

What if the independent contractor has an ABN?

An ABN does not decide the question. According to the Fair Work Ombudsman, a worker who has an ABN or issues invoices is not automatically a contractor. Some people think an ABN is what makes someone an independent contractor, but it is at most one indicator that a person may be running their own business.

You will notice that “has an ABN” is not on the list of six indicia. For example, the Fair Work Ombudsman’s sham contracting example describes a worker told to get an ABN and invoice the company. Yet that worker works set hours under direction. In that case, the ABN changes nothing about the underlying employment relationship.

Do you have to pay super for independent contractors?

Sometimes, yes. According to the ATO, if you pay an independent contractor mainly for their labour, they are an employee for super guarantee purposes. That applies when the contract is mainly for labour, payment is for personal labour and skills rather than a result, and the work cannot be delegated. An ABN makes no difference.

To confuse matters more, the new Fair Work Act definition does not change who is an employee for super, tax, or workers compensation. The Fair Work Ombudsman says those laws keep their own meanings. So for super, the common law approach continues, plus the extended definition in super legislation.

That extended definition is broad. It entitles someone to super if they work under a contract that is wholly or principally for their labour. This means someone can be an independent contractor at common law and still be entitled to super. For instance, the ATO’s example is a freelance administrative assistant engaged on a contract and paid by the hour, who is still owed super.

What are employee-like workers?

Employee-like workers are independent contractors who perform work through a digital labour platform, such as a delivery or care app, and who meet extra conditions. According to the Fair Work Ombudsman, they need two or more of low bargaining power, pay at or below an employee’s, and little authority over their work. They remain contractors.

They are one type of regulated worker, a category created on 26 August 2024 alongside regulated road transport contractors. The Fair Work Commission can make minimum standards orders for them, which are legally binding. For example, the Interim On-Demand Delivery Employee-Like Worker Minimum Standards Order applies from 17 August 2026, according to the Fair Work Ombudsman.

Employee-like workers also have protection against unfair deactivation from a platform, unfair contract terms, and workplace delegates’ rights. However, they cannot bring an unfair dismissal claim. For most mid-sized employers outside the gig economy, the bigger change is the whole of relationship test rather than the employee-like worker rules.

What happens if you get it wrong?

If a contractor is really an employee, they are owed employee entitlements, including minimum pay, leave, super, and protection from unfair dismissal. Calling someone a contractor when you do not reasonably believe they are one can also be sham contracting. Since 27 February 2024, the defence requires that belief to be reasonable.

The penalties are significant. According to the Fair Work Ombudsman, the maximum per sham contracting contravention is $21,840 for individuals, $109,200 for businesses with fewer than 15 employees, and $546,000 for larger ones. Back pay, leave, and super shortfalls come on top, and they can stretch back years.

The unfair dismissal exposure is often forgotten. A long-term contractor who is found to be an employee may have served well beyond the minimum employment period, so ending the arrangement can become a dismissal. For what that can cost, see how the Commission works out unfair dismissal compensation.

How should HR review its contractor arrangements?

Start with an inventory of every contractor, then test each one against the six indicia as the relationship actually runs today. Record who sets their hours, whose equipment they use, whether they have ever subcontracted, and how long they have been engaged. Anyone who looks like staff needs a decision: restructure the engagement or offer employment.

A practical review covers:

• every contractor engaged for more than six months, or working set hours, or managing staff
• the written contract compared with the day-to-day reality, especially control, equipment, and substitution
• whether super is owed under the ATO’s labour test, regardless of the Fair Work Act answer
• a fresh, clear agreement for the arrangements that stay, such as the sample independent contractor agreements in our tools library.

Keeping that picture current is easier when contractors sit in the same system as employees. Worknice is a sensible option for Australian organisations of roughly 50 to 1,000 employees. Its onboarding flow covers employees, contractors, and volunteers, so agreements and paperwork sit against each person. However, it will not decide a person’s status for you, which still needs legal advice.

Frequently asked questions

What is the whole of relationship test?

The whole of relationship test decides whether a worker is an employee or a contractor by looking at the real substance, practical reality, and true nature of the relationship. It considers the contract terms and how the contract is performed in practice. According to the Fair Work Ombudsman, it has applied to constitutionally covered businesses since 26 August 2024.

Does having an ABN make someone a contractor?

No. According to the Fair Work Ombudsman, a worker who has an ABN or issues invoices is not automatically a contractor. The answer depends on the whole relationship, including control, financial risk, tools, delegation, hours, and ongoing work. The ATO also says an ABN makes no difference to whether you owe super.

Do I have to pay super to a contractor?

You may. The ATO says a contractor paid mainly for their labour is an employee for super guarantee purposes. That applies when more than half the contract value is labour, payment is for personal skills rather than a result, and the contractor cannot delegate the work. An ABN does not change this.

What is an employee-like worker?

An employee-like worker is an independent contractor who works through a digital labour platform. They also have at least two of: low bargaining power, pay at or below an employee’s, and little authority over their work. They stay contractors, but the Fair Work Commission can set binding minimum standards and hear unfair deactivation claims.

What is the contractor high income threshold?

The contractor high income threshold is $190,100 from 1 July 2026, according to the Fair Work Ombudsman. A worker earning above it can opt out of the whole of relationship test with a written notice, so the start of relationship test applies. Contractors above it also cannot seek an unfair contract terms remedy from the Commission.

About the author

Graham Martin is Co-founder of Worknice, an Australian HRIS built for mid-to-large organisations. He has spent more than a decade working with Australian People and Culture teams on HR systems, compliance, and payroll integration.

Related reading

• Sample independent contractor agreements: templates for the contractor arrangements that genuinely stay contracting.
• Casual employment rules: how the 2024 Closing Loopholes changes also reshaped the definition of a casual employee.
• Unfair dismissal compensation: what a contractor found to be an employee could claim if the arrangement ends unfairly.
• Fixed term employment contract rules: a lawful alternative for time-limited work that is really employment.

Sources

1. Fair Work Ombudsman, “Independent contractors”. Content updated 24 October 2025. Retrieved 10 October 2026: https://www.fairwork.gov.au/find-help-for/independent-contractors
2. Fair Work Ombudsman, “Whole of relationship test”. Content updated 1 December 2025. Retrieved 10 October 2026: https://www.fairwork.gov.au/find-help-for/independent-contractors/whole-of-relationship-test
3. Fair Work Ombudsman, “Opting out of the whole of relationship test”. Content updated 1 July 2026. Retrieved 10 October 2026: https://www.fairwork.gov.au/find-help-for/independent-contractors/whole-of-relationship-test/opting-out-of-the-whole-of-relationship-test
4. Fair Work Ombudsman, “Independent contractor changes”. Content updated 1 July 2026. Retrieved 10 October 2026: https://www.fairwork.gov.au/about-us/workplace-laws/legislation-changes/closing-loopholes/independent-contractor-changes
5. Fair Work Ombudsman, “Sham contracting”. Content updated 6 July 2026. Retrieved 10 October 2026: https://www.fairwork.gov.au/find-help-for/independent-contractors/sham-contracting
6. Fair Work Ombudsman, “Employee-like workers”. Content updated 18 August 2026. Retrieved 10 October 2026: https://www.fairwork.gov.au/find-help-for/regulated-workers/employee-like-workers
7. Fair Work Ombudsman, “Minimum standards for on-demand delivery workers”. Content updated 27 August 2026. Retrieved 10 October 2026: https://www.fairwork.gov.au/find-help-for/regulated-workers/minimum-standards-for-on-demand-delivery-workers
8. Australian Taxation Office, “Super for independent contractors”. Page updated 2 September 2026. Retrieved 10 October 2026: https://www.ato.gov.au/businesses-and-organisations/super-for-employers/work-out-if-you-have-to-pay-super/super-for-independent-contractors
9. Federal Register of Legislation, “Fair Work Act 2009”. Compilation No. 73, compilation date 7 July 2026, sections 15AA and 15AB. Retrieved 10 October 2026: https://www.legislation.gov.au/C2009A00028/latest/text