Australia’s Fair Work laws don’t care what you call someone — only how they work.
If you’ve hired someone as a “contractor” but they’re operating like an employee, you’re sitting on a legal time bomb. It’s one of the most common and costly mistakes small businesses make — and the penalties are getting steeper.
What’s the Big Deal?
When a contractor is misclassified, the employer may be:
- Liable for back-paid superannuation, leave, and overtime
- Exposed to Fair Work proceedings for underpayments
- At risk of a sham contracting claim under the Fair Work Act
- Responsible for PAYG tax obligations they didn’t withhold
- Audited by the ATO and Fair Work Ombudsman
The consequences can stretch back 6 years — even if the relationship ended long ago.
Contractor vs Employee: The Legal Test
The High Court of Australia clarified in 2022 that what’s written in the contract matters — but only if it reflects the real working relationship.
The main factors considered include:
- Control: Do you direct how, when, and where they work?
- Integration: Are they part of your organisation’s structure?
- Tools & equipment: Do you supply them?
- Risk & reward: Do they have the opportunity to profit or suffer a loss?
- Independence: Can they work for others simultaneously?
- Leave & entitlements: Do they take leave, attend staff events, or follow internal policies?
If someone works full-time hours, uses your tools, and reports to a manager — they probably aren’t a contractor, even if they have an ABN.
Real-World Red Flags
- You ask for an ABN only after hiring
- They submit timesheets, not invoices
- They work on your premises full-time
- They attend internal performance reviews
- They can’t delegate their work to others
If any of these sound familiar, it’s time to review the arrangement — fast.
Casual Conversion Risks
Some businesses also misclassify casual employees, assuming it gives them flexibility. But under the Fair Work Amendment (Supporting Australia’s Jobs and Economic Recovery) Act 2021, casuals can request permanent conversion after 6–12 months.
If you’re using casual contracts to avoid entitlements, you could be creating a bigger compliance headache later.
Sham Contracting Explained
A sham contracting arrangement occurs when an employer knowingly or recklessly misrepresents an employment relationship as independent contracting.
Penalties can reach:
- $82,500 per breach for companies
- $16,500 for individuals
This applies even if the contractor “agreed” — the law protects the worker, not the agreement.
What You Should Be Doing
- Use a Contractor Checklist
Before onboarding anyone, assess the true nature of the role. - Draft Contracts That Reflect Reality
Use tailored contractor agreements, not generic templates. - Audit Existing Relationships
Especially if you’ve re-engaged former employees or long-term casuals as “contractors.” - Limit Risky Practices
Avoid assigning KPIs, enforcing set hours, or including contractors in internal systems or policies. - Use a Professional Review
Have your contracts and arrangements audited by external HR or legal teams.
Who Can Help?
Many small businesses try to navigate contractor arrangements on their own — and that’s exactly how they get into trouble.
A third-party like Hack Your HR helps Australian businesses:
- Conduct classification reviews
- Re-draft contractor agreements
- Transition contractors to compliant employment relationships
- Respond to Fair Work audits and claims
- Build a sustainable mix of casual, permanent, and contract talent
Final Word
Just because someone has an ABN doesn’t mean they’re a contractor. The law looks at substance over structure — and missteps can cost you years of backpay, super, and legal stress.
If you’re not 100% sure your contractor arrangements are watertight, it’s time to get help — before Fair Work knocks on your door.