Published: February 2026
Getting the contractor versus employee classification wrong is one of the most expensive compliance failures an Australian business can make. The ATO, Fair Work Ombudsman, and state revenue offices all apply their own tests, share information between agencies, and actively pursue misclassification cases. A single tip-off from a disgruntled worker can trigger simultaneous investigations across multiple regulators.
The financial exposure is severe. Misclassifying an employee as a contractor can result in:
This article explains how the classification tests work in 2026, provides a step-by-step checklist based on the ATO whole-of-relationship factors, and highlights the industries and arrangements most at risk.
The legal framework for worker classification in Australia was reshaped by two High Court decisions in 2022: CFMMEU v Personnel Contracting and ZG Operations v Jamsek. These cases confirmed that the written contract is the primary starting point for determining whether a worker is an employee or contractor. Where the contract is comprehensive and genuinely reflects the parties' agreement, the legal rights and obligations in the contract are what matter.
However, the contract is not the end of the analysis. If a contract does not comprehensively or genuinely reflect the real arrangement, regulators and courts can look beyond its terms to the substance of the relationship. Having a contract that says "independent contractor" does not make someone a contractor if the contractual terms themselves establish an employment relationship.
The ATO's current approach, reflected in TR 2023/4, applies a whole-of-relationship test based on the legal rights and obligations contained in the contract. Fair Work applies aligned factors but with a focus on employment entitlements and sham contracting provisions.
The defence for sham contracting was tightened under the Fair Work Legislation Amendment (Closing Loopholes) Act 2023. Previously, an employer could defend a sham contracting claim by showing they did not know and were not reckless about the misclassification. The new test requires the employer to prove they did not know, and could not reasonably be expected to have known, that the arrangement was actually an employment relationship. This is a significantly harder standard to meet.
The Fair Work Commission now has jurisdiction to deal with disputes about unfair terms in service contracts for independent contractors. This means contractors who believe their contracts contain unfair terms have a regulatory pathway to challenge them, adding another layer of risk for businesses that use one-sided contractor agreements.
The ATO assesses multiple factors collectively. No single factor is decisive. The overall picture determines whether a worker is serving in your business (employee) or providing services to your business (contractor).
Does the contract give the business the right to control how, when, and where the work is done? If the business directs the methods, hours, and location of work, this indicates an employment relationship. If the worker has genuine discretion over how they complete the work, this indicates a contractor relationship.
Is the worker paid for time worked (hourly, daily, weekly) or for a specific result or deliverable? Payment for time is an employee indicator. Payment for a quoted price or completed project is a contractor indicator.
Can the worker delegate or subcontract the work to someone else under the terms of the contract? A genuine right to delegate is a strong contractor indicator. If the worker must personally perform the work, this suggests employment.
Who provides the tools, equipment, and materials needed to do the work? If the business provides them, this indicates employment. If the worker provides their own without reimbursement, this indicates a contractor relationship.
Who bears the financial risk of the work? If the worker is responsible for defects, damage, or poor outcomes at their own cost, this indicates a contractor. If the business bears these risks, this indicates employment.
Does the worker generate goodwill for their own business, or for yours? A contractor building their own client base and reputation is a contractor indicator. A worker who represents your business to clients, wears your uniform, uses your email address, and attends your staff meetings looks like an employee.
Is the worker integrated into your business as part of its structure and operations? Attending internal meetings, being listed on the company website, having an internal email address, and being part of team communications all suggest employment.
Fair Work applies the same underlying factors but with additional focus on:
Certain industries and working patterns are subject to heightened scrutiny in 2026:
Long-term sole trader contractors working exclusively for one client are particularly vulnerable. Even if the contract is well-drafted, the economic reality of dependence on a single client raises red flags for every regulator.
Even where a worker is legitimately classified as a contractor for general employment law purposes, they may still be deemed an "employee" for superannuation guarantee (SG) purposes under a separate definition. This applies where:
This is a standalone test. A worker can be a genuine contractor for Fair Work and payroll tax purposes but still be entitled to superannuation under the SG Act. The two classifications operate independently.
From 1 July 2026, Payday Super requirements will also apply to contractors who are deemed employees for SG purposes. This means super must be paid within seven business days of the pay date, not quarterly.
Review all current contractor arrangements against the factors above. Pay particular attention to:
If any of your arrangements raise concerns, seek advice before the arrangement is challenged by a regulator. Prevention is significantly cheaper than remediation.
No. An ABN is a tax registration number, not a determination of employment status. A worker can hold an ABN and still be classified as an employee for tax, super, payroll tax, and Fair Work purposes. The classification depends on the legal rights and obligations in the contract and the substance of the working relationship, not the existence of an ABN.
It is technically possible for a person to be an employee in one capacity and a contractor in another, but this is high-risk. For example, someone might work regular admin shifts as an employee and separately provide consulting services as a contractor for a distinct project. However, regulators will closely examine whether the contractor component is genuinely independent or simply an attempt to avoid employment obligations.
Not all, but many. If the contract is principally for the person's labour, the person performs the work personally and cannot delegate, and the person is paid for time rather than a result, you must pay superannuation regardless of how the relationship is labelled. This is a separate test from the general employment classification.
Sham contracting occurs when an employer misrepresents an employment relationship as an independent contractor arrangement. As at February 2026, civil penalties are up to $112,500 per contravention for individuals and $562,500 per contravention for companies. The defence was tightened in February 2024, requiring employers to prove they could not reasonably have been expected to know the arrangement was actually employment.
Seek professional advice before the arrangement is challenged by a regulator. Voluntary disclosure and correction is always treated more favourably than being caught by an ATO audit, Fair Work complaint, or state revenue office investigation. The cost of prevention is a fraction of the cost of back-paid super, PAYG, payroll tax, and penalties going back multiple years.
Disclaimer: Worker classification law is complex and fact-specific. The information in this article reflects the legal position as at February 2026. Classification outcomes depend on the specific facts of each arrangement. This article is general information only and does not constitute tax, employment, or legal advice. Seek professional advice for your specific circumstances.
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