Correctly classifying a worker as an employee or independent contractor is one of the most important compliance decisions a small business makes. The distinction affects tax obligations, superannuation, leave entitlements, workers' compensation, and Fair Work protections.
The High Court's decision in CFMMEU v Personnel Contracting (2022) clarified that the written contract is the primary reference point — but only if it reflects the true nature of the arrangement. Courts look at several factors: control over how work is performed, provision of tools and equipment, ability to delegate or subcontract, assumption of financial risk, working for multiple clients, and integration into the business.
Employees receive PAYG tax withholding, super guarantee, paid leave (annual, personal, long service), notice of termination, and unfair dismissal protections. Contractors manage their own tax, arrange their own super and insurance, and have none of these entitlements.
If you're unsure, the ATO's "Employee/contractor decision tool" on ato.gov.au provides a guided assessment. For borderline cases, seek specific legal or accounting advice before engaging the worker — the cost of a professional opinion is trivial compared to the penalties for misclassification.