Every person who works for your business should have a written contract. Not because it is always legally required (though in many cases it is), but because the absence of one is where disputes start and penalties follow. In March 2026, the ATO and Fair Work Ombudsman jointly announced they are ramping up investigations into sham contracting, with penalties reaching up to $495,000 per contravention for larger businesses and up to $19,800 per contravention for individuals. Since December 2023, fixed-term contracts have been subject to strict new rules including a maximum two-year duration and limits on consecutive contracts. This guide covers every contract type Australian SMEs use, what each one must include, the recent legislative changes that affect how you engage people, and the consequences of getting the classification wrong.
A permanent employment contract has no specified end date. The employment continues until either the employer or the employee terminates it in accordance with the contract and the Fair Work Act. Permanent employees can be full-time (38 ordinary hours per week) or part-time (fewer than 38 hours with a regular pattern). Both are entitled to the full suite of National Employment Standards entitlements including paid annual leave, personal leave, notice of termination, and redundancy pay. For a detailed comparison of what each employment type costs, our guide on the 3 types of employment in Australia covers full-time, part-time, and casual in depth.
There is no single prescribed format, but best practice (and award compliance) requires that a permanent employment contract clearly states the employee's full name and the employer's legal entity name, the commencement date, the position title and a summary of duties, the employment type (full-time or part-time), ordinary hours of work (and the pattern of hours for part-time employees), the applicable Modern Award or enterprise agreement (if any), the base salary or hourly rate, the superannuation fund and contribution rate, the notice period required by both parties, and any probationary period.
Part-time contracts carry an additional requirement. The Fair Work Act and most awards require that part-time employees have their ordinary hours agreed in writing at the start of employment, including the days of the week and start and finish times. Failing to document this can result in the employee being classified as casual, with the associated 25% loading liability.
Probationary periods are not part of the NES but are permitted under employment contracts. Typical periods are three to six months. During probation, a shorter notice period usually applies (often one week). Note that probation does not affect the minimum employment period for unfair dismissal protection, which is six months for employers with 15 or more employees and 12 months for small business employers. Our guide on probation periods in Australia covers the rules in detail.
A fixed-term contract specifies an end date or event. The employment terminates when the date passes or the event occurs (such as the completion of a project or the return of an employee from parental leave). From 6 December 2023, significant restrictions apply to how fixed-term contracts can be used. These rules came from the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 and are designed to push more workers into permanent employment.
Maximum two-year duration. A fixed-term contract cannot be for more than two years, including any extensions or renewals. A three-year contract entered after 6 December 2023 breaches the limitations regardless of the reason for the engagement.
No more than two consecutive contracts. An employer cannot offer more than two consecutive fixed-term contracts for the same or substantially similar work. If the employee has already completed two contracts, the next engagement must be permanent or the role must genuinely change.
One extension only. A fixed-term contract that includes an option to extend can only be extended once.
Mandatory information statement. Employers must provide every new fixed-term employee with a Fixed Term Contract Information Statement (FTCIS) at or before the commencement of employment, in addition to the standard Fair Work Information Statement.
The limitations do not apply in all circumstances. Key exceptions include employees engaged to perform a specific task requiring specialised skills, employees earning above the high-income threshold ($175,000 from 1 July 2025), employees engaged under a training arrangement (such as apprenticeships), and employees engaged to cover another employee on leave. Some industry-specific exceptions that previously applied to sectors like organised sport and charities expired on 1 November 2025, meaning the full limitations now apply across all industries.
A fixed-term contract that does not comply with the limitations is still valid, but the end date ceases to have effect. In practice, the employee is treated as a permanent employee and gains all associated entitlements, including notice of termination and redundancy pay. The employer may also face adverse action claims if the breach was intentional. Either party can apply to the Fair Work Commission to resolve disputes about fixed-term contracts.
A max-term contract is similar to a fixed-term contract but includes a notice period and allows either party to terminate before the end date. The employment has a maximum duration but is not guaranteed to run for the full period. Max-term contracts are subject to the same post-2023 limitations as fixed-term contracts. The key practical difference is that termination before the end date follows normal notice requirements, whereas ending a fixed-term contract early (without a notice clause) can give rise to a claim for payment of the remaining term.
Casual employees do not have guaranteed hours and are engaged on a shift-by-shift basis. While there is no legal requirement for a written contract, a casual engagement letter is strongly recommended and should clearly document the casual nature of the engagement. Following the August 2024 reforms, the definition of a casual employee is now based on an assessment of the real substance, practical reality and true nature of the employment relationship, not solely the terms of the contract.
A clear statement that the engagement is casual with no guarantee of ongoing work, the hourly rate inclusive of the 25% casual loading (and a breakdown showing the base rate plus loading), the applicable award, the requirement for the employee to accept or decline each shift, a reference to the Casual Employment Information Statement (which must be provided on commencement), and information about the Employee Choice Pathway for casual conversion. Our contractor vs employee cost calculator helps you compare the true cost of engaging someone as a casual versus permanent.
From 26 February 2025 (or 26 August 2025 for small business employers with fewer than 15 employees), eligible casual employees can notify their employer that they wish to convert to permanent employment. Employers cannot refuse unless there are fair and reasonable operational grounds. This replaced the previous employer-initiated casual conversion process. The implication for SMEs is that long-term casuals who work regular patterns are increasingly likely to seek conversion, which changes your cost base and entitlement obligations. Our casual conversion guide explains the process step by step.
An independent contractor agreement governs a commercial relationship, not an employment relationship. The contractor operates their own business, invoices for services, manages their own tax and super, and (in a genuine arrangement) controls how the work is performed. Getting this classification wrong is one of the most expensive compliance failures in Australian employment law.
Following the High Court decisions in CFMMEU v Personnel Contracting (2022) and ZG Operations v Jamsek (2022), the primary test focuses on the terms of the written contract. However, a contract labelling someone as a contractor does not make them one if the substance of the arrangement points to employment. The ATO and Fair Work Ombudsman apply a multi-factor assessment looking at control (does the business dictate how, when, and where the work is done?), tools and equipment (who provides them?), financial risk (can the worker profit or lose from the arrangement?), delegation (can the worker subcontract?), exclusivity (does the worker serve other clients?), and integration (is the worker part of the business's operations?).
In March 2026, the ATO and Fair Work Ombudsman issued a joint warning that sham contracting investigations are intensifying across construction, road freight, cleaning, IT, and the gig economy. The penalties are severe and stack up rapidly.
Under section 357 of the Fair Work Act, misrepresenting an employment relationship as a contractor arrangement carries civil penalties of up to $19,800 per contravention for individuals and up to $99,000 per contravention for small businesses (fewer than 15 employees). For larger businesses, the penalty is the greater of $495,000 or three times the underpayment amount. Each pay period during which the sham arrangement continues can constitute a separate contravention, so a 12-month arrangement with fortnightly pay could theoretically generate 26 separate contraventions.
Beyond the Fair Work penalties, employers also face back-payment of all employee entitlements for the entire period (leave, super, notice, redundancy), ATO penalties for unpaid PAYG withholding and super guarantee, state-based penalties for failing to hold workers compensation insurance, and potential criminal prosecution under wage theft laws in Victoria and Queensland. Our contractor vs employee classification checklist helps you assess whether your arrangements are genuinely independent contracting.
The contractor's ABN, a description of the services (defined by outcome, not by hours), payment terms (per project or milestone, not hourly like an employee), a clear statement that the contractor is responsible for their own tax, super, and insurance, the right to delegate or subcontract, intellectual property ownership, confidentiality provisions, and termination clauses. The agreement should not include set hours, employer-provided tools, exclusive service requirements, or provisions that are typically found in employment contracts (such as leave entitlements or disciplinary procedures).
Labour hire involves a triangular relationship: the worker is employed by the labour hire agency but performs work at the host employer's site under the host's direction. The agency handles payroll, leave, and entitlements. The host pays the agency a fee. From a contract perspective, the host engages the agency under a commercial services agreement, while the worker has an employment contract with the agency. Hosts should be aware that labour hire licensing requirements exist in Victoria, Queensland, and South Australia, and the host can face penalties for using an unlicensed provider. Our article on contracting vs employment in HR explores the compliance implications in more detail.
The choice of contract type should match the genuine nature of the working relationship and the business need. Using a fixed-term contract to avoid providing permanent entitlements, or labelling someone a contractor to save on super and leave, is not a legitimate business strategy. It is a compliance risk that regulators are actively pursuing.
Use a permanent contract when the role is ongoing, the hours are predictable, and the position is core to your operations. This is the default and the one regulators expect for ongoing work.
Use a fixed-term contract for genuinely time-limited work such as covering parental leave, delivering a specific project, or filling a role while you recruit permanently. Remember the two-year maximum and the requirement to provide the FTCIS.
Use a casual engagement letter for irregular, unpredictable work where there is no firm advance commitment to continuing and definite work. Be aware that regular casuals may seek conversion to permanent employment.
Use an independent contractor agreement only when the worker genuinely operates their own business, controls how the work is done, assumes financial risk, and serves multiple clients. If you cannot honestly satisfy these criteria, the arrangement is likely employment.
If you are unsure which structure is right, our hire vs outsource decision wizard can help you work through the decision. For a cost comparison across different engagement models, the hire vs outsource calculator runs the numbers side by side.
The Fair Work Act does not mandate a written employment contract for all employees. However, certain awards and the NES require employers to provide written confirmation of specific terms, such as the type of employment, ordinary hours, and the applicable award. In practice, operating without written contracts exposes you to disputes about terms that were never documented and makes it significantly harder to defend claims.
You should issue a new contract or a variation letter confirming the change to permanent employment, the removal of the end date, and any changes to terms such as notice periods or entitlements. While the conversion may happen automatically if the fixed-term limitations are breached, documenting it properly protects both parties.
Two years, including any extensions or renewals. This limitation applies to contracts entered into from 6 December 2023. Contracts that commenced before that date are not subject to the limitation, but they count towards the two-year cap if a new contract is offered after 6 December 2023.
You face penalties under the Fair Work Act of up to $19,800 per contravention for individuals and up to $495,000 or three times the underpayment for larger businesses. You will also be liable for back-payment of all employee entitlements (leave, super, notice, redundancy) for the entire period of the relationship, plus ATO penalties for unpaid PAYG withholding and super guarantee charge.
Exclusivity alone does not determine employment status, but it is a significant indicator. The ATO flags contractors working almost exclusively for one business through the Taxable Payments Annual Reporting system. If the worker also uses your tools, works set hours, and cannot subcontract, the arrangement is almost certainly employment regardless of the contract label.
Yes. From 6 December 2023, employers must provide every employee engaged on a new fixed-term contract with a copy of the FTCIS at or before the commencement of employment. This is in addition to the Fair Work Information Statement that must be provided to all new employees.
Yes, under the Employee Choice Pathway introduced in 2024. From 26 February 2025 (or 26 August 2025 for small business employers), eligible casual employees can notify their employer that they wish to convert to full-time or part-time employment. The employer can only refuse on fair and reasonable operational grounds.
A fixed-term contract ends on a specified date and cannot be terminated early unless the contract includes a termination clause. A max-term contract also has an end date but includes provisions allowing either party to terminate before that date with notice. Both are subject to the same post-December 2023 limitations on duration and consecutive use.
At minimum, review contracts when the Fair Work Commission issues its annual wage review (typically July each year), when the applicable award is updated, when the employee's role changes significantly, when legislation changes (such as the fixed-term contract reforms or casual conversion changes), and before any termination to confirm notice and entitlement obligations.
Scale Suite is a Sydney-based provider of outsourced HR and finance services for Australian SMEs. We deliver payroll processing, recruitment support, employee onboarding, employee development, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
Employment Hero Gold Partner, CA-qualified, and Xero Certified, we replace fragmented HR processes and reactive people management with one responsive HR function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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Disclaimer: This article is general information only and does not constitute employment, legal, or financial advice. Employment contract requirements vary by award, enterprise agreement, and jurisdiction. Always seek advice specific to your situation from a qualified employment relations professional or contact the Fair Work Ombudsman on 13 13 94.
Sources:
Fair Work Ombudsman, Fixed Term Contract Employeeshttps://www.fairwork.gov.au/starting-employment/types-of-employees/fixed-term-contract-employees
Fair Work Ombudsman, Sham Contractinghttps://www.fairwork.gov.au/find-help-for/independent-contractors/sham-contracting
ATO, Sham Contracting in the Spotlight (March 2026)https://www.ato.gov.au/media-centre/sham-contracting-in-the-spotlight
Fair Work Act 2009 (Cth), sections 333E, 357-359
High Court of Australia, CFMMEU v Personnel Contracting [2022] HCA 1; ZG Operations v Jamsek [2022] HCA 2
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
Employment Hero Gold Partner, CA-qualified, and Xero Certified, we replace fragmented finance and HR processes with one responsive, senior-level function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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