The Hidden Costs of Using Contractors (And What Most Businesses Miss)

The Hidden Costs of Using Contractors (And What Most Businesses Miss)

From startups to multinationals, Australian businesses love the flexibility of engaging contractors. No leave entitlements. No PAYG withholding. No long-term commitment. Sounds perfect, right?

Not quite.

What many employers miss is that the contractor model comes with hidden risks — especially if it’s poorly documented or misused. And if the Fair Work Ombudsman comes knocking, saying “we thought they were a contractor” won’t cut it.

Why Businesses Favour Contractors

Let’s be honest — the appeal of contractors is real:

• Cost-effective: No super, leave, or payroll tax.
• Flexible: Use them when you need, and scale down when you don’t.
• Less HR admin: No onboarding, policies, or internal performance management.

But these “savings” can be wiped out in a heartbeat if you’re not legally watertight.

The Line Between Contractor and Employee Isn’t Always Clear

Recent High Court rulings in CFMMEU v Personnel Contracting and ZG Operations v Jamsek have reframed how we distinguish between contractors and employees. The focus is now squarely on the written contract — not just the nature of the relationship over time.

But here’s the catch: even a good contract won’t save you if it’s not aligned to reality.

Common Missteps That Lead to Legal Trouble

1. Controlling the contractor like an employee
   • Dictating work hours, approving leave, requiring exclusive service
   • If it walks and quacks like an employee, the courts may agree
2. No proper agreement in place
   • Many businesses rely on email or verbal arrangements
   • Without a signed contract, you’re wide open to claims
3. Sham contracting
   • Intentionally (or carelessly) misclassifying someone to avoid obligations
   • A serious breach under the Fair Work Act
4. Using contractors for roles that are core and ongoing
   • If the person works regular hours long-term, you may be masking a permanent role

The Hidden Financial Risks

Misclassifying a contractor as an employee can result in:

• Back pay for leave, super, and entitlements
• PAYG and payroll tax liabilities
• Penalties from the ATO and Fair Work Ombudsman
• Unfair dismissal or general protections claims

All of this can add up to tens of thousands of dollars — not to mention the reputational damage if you end up in the headlines.

Questions Every Employer Should Ask Before Engaging a Contractor

• Will this person control their own hours and method of work?
• Will they use their own tools and equipment?
• Are they free to work for other clients?
• Will they invoice me directly and handle their own tax and super?
• Am I using them to fill a permanent, ongoing role?

If you answer “no” to most of these, you’re likely dealing with an employee — regardless of what the contract says.

How to Protect Your Business

✅ Draft airtight contractor agreements

Use agreements that clearly outline the nature of the relationship, responsibilities, payment structure, and independence. These should be reviewed regularly.

✅ Align contract terms with real-world practices

If your contractor is working like an employee day-to-day, your documentation won’t save you.

✅ Conduct audits of existing arrangements

Review your current workforce to identify roles that may be misclassified. Many businesses uncover risks during routine HR or payroll reviews.

✅ Train your hiring managers

They’re often the ones engaging contractors — make sure they understand the legal differences and compliance implications.

Need Help Auditing Contractor Risk?

Several Australian consultancies now specialise in workforce audits and contractor compliance. One such firm, Hack Your HR, offers:

• Contractor classification reviews
• Agreement templates aligned to recent High Court decisions
• Advice on engagement models that minimise exposure
• Implementation support for workforce transitions

(As an independent provider, they’re often engaged by businesses looking to get ahead of Fair Work claims.)

Don’t Rely on Assumptions — or Generic Contracts

Many businesses use outdated templates from years ago or rely on contractor agreements lifted from overseas websites. But the Australian legal environment is distinctly unique, and using the wrong framework is a ticking time bomb.

If you’re scaling, considering labour hire, or using more freelancers post-COVID, it’s worth investing in a contractor management strategy that’s futureproofed.

Final Word: Flexibility Is Good — But So Is Compliance

Contractors will continue to be part of the modern workforce. But with increasing scrutiny, getting it wrong is more expensive than ever.

Get your house in order. Document properly. And know the difference between flexibility and legal fiction.