Last updated: 09 October 2026. Written by the FreeMyCloud team.
The short answer on contractor vs employee in Australia
- Since 26 August 2024, section 15AA of the Fair Work Act decides contractor vs employee on the real substance of the relationship, not the label on the contract.
- An ABN, an invoice and a signed contractor agreement do not settle it on their own.
- A contractor paid wholly or principally for their labour is an employee for superannuation, so super is owed at 12% on their qualifying earnings.
- Only a contractor earning above the contractor high income threshold ($175,000 for the year from 1 July 2024, indexed each 1 July) can opt out of the section 15AA test.
- Telling an employee they are a contractor, or sacking someone to re-engage them as one for the same work, is sham contracting under sections 357 to 359.
Checked against the Fair Work Ombudsman independent contractors and sham contracting pages, the ATO employee or independent contractor page and the ATO super for independent contractors page on 9 October 2026.
The contractor vs employee question is not settled by what the contract is called. Since 26 August 2024, section 15AA of the Fair Work Act 2009 has required that whether someone is an employee be worked out by ascertaining the real substance, practical reality and true nature of the relationship, looking at the totality of it, and having regard not only to the written terms but to how the contract is performed in practice. Separately, the superannuation rules have their own, wider definition of employee, so a worker can invoice as a contractor and still be owed super. This article sets out the statutory test, the opt out available to higher earning contractors, who is owed superannuation, what sham contracting is, the protections that now reach some contractors regardless of classification, and what the classification changes in the books.
Independent contractor vs employee: what does Australian law actually test?
For the purposes of the Fair Work Act 2009, section 15AA(1) provides that whether an individual is an employee of a person within the ordinary meaning of that expression is “to be determined by ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person”.
Section 15AA(2) then directs how that is done. The totality of the relationship must be considered, and in considering that totality, “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”.
The section carries an explanatory note on the face of the Act recording that it was enacted as a response to two High Court decisions, CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2. Those decisions had put the written contract at the centre of the question. Section 15AA restores the practical working relationship to the centre of it.
Section 15AA was inserted by the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024. That Act received Royal Assent on 26 February 2024, and the Part containing section 15AA commenced on 26 August 2024 under table item 21 of the commencement table in subsection 2(1).
| What section 15AA requires | What that rules out |
|---|---|
| Ascertaining the real substance, practical reality and true nature of the relationship | Treating a label chosen by the parties as the answer |
| Considering the totality of the relationship | Deciding on a single factor, such as holding an ABN or issuing invoices |
| Regard to the terms of the contract | Ignoring the written agreement, which still counts |
| Regard to how the contract is performed in practice | Relying on the paperwork alone when day to day practice differs from it |
Employee vs contractor: does a contract that says “independent contractor” settle the question?
No. Under section 15AA(2)(b) the written terms are one input, and how the contract is performed in practice is another input of equal standing. A contract describing someone as an independent contractor is relevant evidence, and it is not determinative.
That is why two businesses using the same template agreement can end up in different positions. The document is identical; the practical reality is not. Where the written terms and the day to day arrangement have drifted apart, section 15AA directs attention to both, and the totality of the relationship decides the question.
An ABN, an invoice, a GST registration and a signed services agreement are all consistent with contracting, and none of them is the test. Section 15AA looks at the whole relationship, including how it actually runs.
Can a contractor opt out of the section 15AA test, and what is the contractor high income threshold?
Yes, within limits. Section 15AB allows an individual to give the other party an opt out notice electing that section 15AA does not apply to the relationship. There are conditions on it.
- Under section 15AB(4), a person must not give the individual a notice that they may opt out unless the person considers that, when the notice is given, the individual’s earnings for work performed under the relationship exceed the contractor high income threshold.
- Under section 15AB(5), where such a notice has been given, the individual has 21 days to give an opt out notice. Where no notice has been given by the other party, the individual may give one at any time after the section commenced.
- Under section 15AB(6), only one opt out notice may be given in respect of the relationship.
- Under section 15AB(7), the opt out notice must state that the individual considers their earnings exceed the contractor high income threshold when the notice is given.
The threshold itself is set by regulation. Section 15C provides that the contractor high income threshold is the amount prescribed by, or worked out in the manner prescribed by, the regulations, and that a regulation cannot reduce it. Regulation 1.08AA of the Fair Work Regulations 2009 prescribes $175,000 for the year starting 1 July 2024, and sets out a method statement indexing that amount each 1 July by reference to the assessment of average weekly ordinary time earnings published by the Australian Statistician.
$175,000 is the prescribed amount for the year starting 1 July 2024. Regulation 1.08AA indexes it each 1 July, so the figure for a later year is the indexed amount, not $175,000. The current year’s amount should be confirmed before it is relied on.
Superannuation for contractors: who is owed super even though they invoice?
Superannuation does not follow the Fair Work Act test. The Superannuation Guarantee (Administration) Act 1992 has its own definition, and it is wider.
Section 12(1) states that employee and employer have their ordinary meaning, but that the subsections which follow expand the meaning of those terms and make particular provision to avoid doubt about certain people. The subsection that matters most for contracting is section 12(3): “If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”
Super for contractors: the rate and what it is paid on
So a worker can be an independent contractor at common law and under the Fair Work Act, and still be an employee for superannuation purposes, if the contract they work under is wholly or principally for their labour. The ATO’s super for independent contractors page sets out the same rule in plain terms, and our super due dates page lists when each quarter’s contributions fall due. The rate is set in the same Act. Section 17A(2) provides that “charge percentage means 12”, which is the 12% superannuation guarantee rate applied to qualifying earnings.
| Superannuation Guarantee (Administration) Act 1992 | Effect |
|---|---|
| Section 12(1) | Employee and employer take their ordinary meaning, expanded by the subsections that follow |
| Section 12(2) | A person paid for duties as a member of the executive body of a body corporate is an employee of that body corporate in relation to those duties |
| Section 12(3) | A person working under a contract wholly or principally for their labour is an employee of the other party to the contract |
| Section 12(8) | Includes people paid to perform or present, or participate in, music, a play, dance, entertainment, sport, a display or a promotional activity, and similar activities |
| Section 17A(2) | Charge percentage means 12, the rate applied to qualifying earnings |
This is the mismatch that catches businesses out most often. The Fair Work Act question and the superannuation question are decided under different provisions and can land differently on the same worker. Our explainer on payday super, qualifying earnings and the superannuation guarantee charge covers how and when those contributions have to be paid once the obligation exists.
What counts as sham contracting under the Fair Work Act?
Division 6 of Part 3-1 of the Fair Work Act 2009 deals with sham arrangements. Three sections sit in the independent contracting subdivision, and each is a civil remedy provision.
- Section 357: an employer that employs or proposes to employ an individual must not represent to that individual that the contract of employment is a contract for services under which the individual performs work as an independent contractor.
- Section 358: an employer must not dismiss, or threaten to dismiss, an employee who performs particular work in order to engage that person as an independent contractor to perform the same, or substantially the same, work under a contract for services.
- Section 359: an employer must not make a statement it knows is false in order to persuade or influence an individual to enter into a contract for services to perform, as an independent contractor, the same or substantially the same work.
Section 357 has a defence. Subsection (2) provides that the prohibition does not apply if the employer proves that, when the representation was made, the employer reasonably believed the contract was a contract for services. Subsection (3) sets out how that is assessed: regard must be had to the size and nature of the employer’s enterprise, and regard may be had to any other relevant matters.
The Fair Work Ombudsman sham contracting page (last updated 6 July 2026) lists the maximum penalty for each contravention as $21,840 for an individual, $109,200 for a business with fewer than 15 employees and $546,000 for a business with more than 15 employees. Penalties for civil remedy provisions are expressed in penalty units. Section 4AA(1) of the Crimes Act 1914 sets a penalty unit at $330, subject to indexation under subsection 4AA(3), with the indexed amount published by notifiable instrument.
Which contractors get employee-like protections regardless of how they are classified?
Part 3A of the Fair Work Act created a category of regulated workers who are not employees but who have access to some protections. Two groups are covered: employee-like workers performing digital platform work, and regulated road transport contractors.
Section 15P defines an employee-like worker. The person must be a party to a services contract other than as a principal, or a director, family member of a director, trustee or partner performing work under such a contract. They must perform all or a significant majority of the work under the contract, the work must be digital platform work, they must not perform any of the work as an employee, and they must satisfy two or more of the following: low bargaining power in negotiating the contract, remuneration at or below the rate of an employee performing comparable work, a low degree of authority over the performance of the work, or other prescribed characteristics.
A digital labour platform is defined as an online enabled application, website or system operated to arrange, allocate or facilitate the provision of labour services, where the operator engages independent contractors directly or indirectly through it, or acts as an intermediary for more than one distinct but interdependent set of users, and where payments referable to the work are processed through it.
Part 3A also opens two jurisdictions in the Fair Work Commission that do not depend on being an employee. An application about unfair deactivation or termination, and an application for a remedy where a services contract contains an unfair term, can each be made only where the sum of the person’s annual rate of earnings and other amounts worked out under the regulations is less than the contractor high income threshold.
Whether a worker is an employee under the Fair Work Act, whether they are an employee for superannuation under section 12 of the Superannuation Guarantee (Administration) Act 1992, and whether they are a regulated worker under Part 3A are three different questions decided under three different provisions.
ATO: contractor or employee for PAYG withholding, super and TPAR
The ATO applies the contractor vs employee question for tax and super rather than for workplace rights, and it publishes its own guidance on the difference between employees and independent contractors. The practical consequences for a business sit in three places: whether PAYG is withheld from the worker’s pay, whether superannuation is paid on their earnings, and whether payments to them are reported to the ATO on a Taxable Payments Annual Report.
- PAYG withholding: an employee has tax withheld through payroll and reported through Single Touch Payroll; a genuine contractor quotes an ABN and is paid on invoice. Our guide to outsourced payroll services covers the payroll side.
- Superannuation: owed to an employee, and to a contractor paid wholly or principally for their labour under section 12(3), as set out above.
- TPAR: businesses in building and construction, cleaning, courier, road freight, IT and security services report payments to contractors each year by 28 August. Our TPAR explainer covers who has to lodge, and our posts on bookkeeping for tradies and bookkeeping for builders show how subcontractor payments are kept TPAR-ready through the year.
On the workplace side, the Fair Work Ombudsman’s independent contractors page explains the rights that follow from each classification, and its sham contracting page explains what the Ombudsman does when an arrangement is challenged.
What changes in the books when a worker is an employee rather than a contractor?
Classification is a legal question, and it has a bookkeeping consequence every pay run. The two treatments do not sit in the same part of the ledger, they do not produce the same reports, and they do not create the same accruals.
| In the books | Treated as an employee | Treated as a contractor |
|---|---|---|
| Where the payment is entered | Payroll, against a wages account | Accounts payable, against a supplier and an expense account |
| Source document | Timesheet or salary record and a payslip | A tax invoice from the worker |
| Single Touch Payroll reporting | Reported through payroll each pay event (see Xero vs MYOB for Australian payroll) | Not reported through payroll |
| Superannuation | Accrued and paid on qualifying earnings | Still required where section 12(3) applies to the contract |
| Leave | Leave balances accrue and are carried as a liability (annual leave loading included where the award provides it) | No leave accrual |
| GST | Wages are not a taxable supply | GST may be charged on the invoice where the worker is registered |
| Reversing a misclassification | Reconstructing payroll, superannuation and leave for the period affected | Unwinding supplier payments already coded as expenses |
The third column of the superannuation row is where most of the contractor vs employee remediation work comes from. A worker treated as a contractor whose contract is wholly or principally for their labour still attracts superannuation under section 12(3), and that obligation is not visible anywhere in the books if every payment to them has been coded as a supplier expense.
Keeping that visible is ordinary bookkeeping discipline: a contractor ledger that records what each engagement is actually for, invoices matched to the engagement rather than to a generic expense code, and a periodic review of which engagements look like contracts for labour. That is the kind of back office work our team handles as part of bookkeeping for contractors and the businesses that engage them, alongside the GST and PAYG instalment mechanics covered in our post on contractor bookkeeping, GST and PAYG instalments.
Classification itself is not a bookkeeping decision. Where it is genuinely unclear, it is a question for the business’s registered tax or BAS agent (our post on who does what between a bookkeeper, BAS agent and accountant draws that line) and, on the workplace relations side, for a qualified workplace relations adviser. What a bookkeeper can do is make sure the records show what the arrangement really is, so the contractor vs employee question can be answered on facts rather than on guesswork. That record-keeping is part of the weekly and monthly work described in what a bookkeeper does, and it is included in outsourced bookkeeping from FreeMyCloud, which costs less than a local bookkeeper for the same hours.
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Frequently asked questions
ABN contractor or employee: does having an ABN make someone a contractor?
No. Section 15AA of the Fair Work Act requires the real substance, practical reality and true nature of the relationship to be ascertained, considering the totality of it. An ABN is one fact among many and settles nothing on its own. The superannuation position is separate again: section 12(3) of the Superannuation Guarantee (Administration) Act 1992 makes a person who works under a contract wholly or principally for their labour an employee of the other party, ABN or not.
When did the current contractor vs employee test start?
Section 15AA was inserted by the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024, which received Royal Assent on 26 February 2024. The Part containing section 15AA commenced on 26 August 2024, under table item 21 of the commencement table in subsection 2(1) of that Act. Relationships in place before that date are assessed under the test from the date it applied.
Can a contractor agree in writing that they are not an employee?
Only in one specific way. Section 15AB lets an individual give an opt out notice electing that section 15AA does not apply, but the other party may only notify them of that option where it considers the individual’s earnings exceed the contractor high income threshold. The individual has 21 days to respond to such a notice, may give only one opt out notice for the relationship, and must state that their earnings exceed the threshold.
What is the contractor high income threshold?
Section 15C of the Fair Work Act provides that it is the amount prescribed by, or worked out in the manner prescribed by, the regulations, and that a regulation cannot reduce it. Regulation 1.08AA of the Fair Work Regulations 2009 prescribes $175,000 for the year starting 1 July 2024 and indexes that amount each 1 July using average weekly ordinary time earnings published by the Australian Statistician.
Is superannuation payable to contractors?
It can be. Section 12(3) of the Superannuation Guarantee (Administration) Act 1992 provides that a person who works under a contract wholly or principally for the labour of the person is an employee of the other party to that contract. Where that applies, superannuation is payable on qualifying earnings at the charge percentage, which section 17A(2) of the same Act sets at 12.
What is sham contracting?
Section 357 of the Fair Work Act prohibits an employer representing to an individual that a contract of employment is a contract for services under which they work as an independent contractor. Sections 358 and 359 prohibit dismissing someone in order to re-engage them as a contractor for the same work, and making a knowingly false statement to persuade them into a contract for services. All three are civil remedy provisions.
This article is general information about Australian bookkeeping and reporting obligations,
current as at 09 October 2026. It is not tax, financial or legal advice. FreeMyCloud is not a
registered tax agent and does not prepare or lodge tax returns. Rates, thresholds and dates
change. Confirm your own position with your registered tax or BAS agent.
