Subcontractor vs Employee in Australia: Which Are You?

You invoice one builder. You start when they say, you use their scaffold, and if you cannot make it on Tuesday there is nobody you are allowed to send in your place. Someone on site tells you that is not really contracting, and they might be right.

The subcontractor vs employee question in Australia is not settled by your ABN and not by the word printed on the contract. It is settled by the whole arrangement, and since 26 August 2024 it is settled twice, by two different tests that can land on two different answers.

The money in it is the super. A contract wholly or principally for your labour makes you an employee for superannuation guarantee purposes whether or not you hold an ABN, and the rate is 12% of qualifying earnings for 2026-27. On $90,000 of labour that is $10,800 a year going somewhere other than your fund, and nobody sends a notice about it.

This guide covers what actually decides your status, why there are now two tests, the workers who are always employees, and what to do if you are on the wrong side of it.

An ABN settles nothing, and neither does the contract

The ATO’s position is blunt. On the page setting out the difference between employees and independent contractors, it says any label you and the business use to describe your relationship, “such as ‘independent contractor’”, “will not determine or be relevant to how your relationship is characterised.”

An ABN is not on either test’s list of factors. It is an identifier for someone carrying on an enterprise, not a status, and you can hold one and still be an employee in law. What it does do is protect your cash flow: leave the ABN off an invoice and a business paying you more than $75 excluding GST is required to withhold tax at the top rate. The rest of what goes on a subbie’s invoice, including when GST belongs on it, sits in our guide to GST for tradies.

The distinction that does the real work is short. An employee serves in the business and performs their work as a representative of it. An independent contractor provides services to the business and performs work to further their own business.

Which side you are on changes a lot for someone on the tools:

• Who pays PAYG withholding, and whether tax comes out before you are paid or you put it aside yourself.
• Whether super goes into your fund automatically.
• Annual leave, sick leave and notice, or none of it.
• Workers compensation cover, and whose policy it is.
• Who pays to fix defective work.
• Whether you can send somebody else.

Our guide for tradies covers how the rest of it fits together once you are on an ABN.

Two laws, two tests, and they can disagree

You are not simply one thing or the other. You are a contractor or an employee for a particular purpose, and the two purposes that matter most now use different tests.

What the ATO asks

The contract, and almost nothing else. The ATO’s page states that “the old multifactorial test is no longer used”, and that the indicia are weighed “by reference only to the legal rights and obligations that arise from the contract you enter into with your worker.”

Then the sentence that surprises people: “Conduct and work practices are not relevant, unless they are, among other things, sufficient to vary the contractual terms agreed to.”

So for tax and super, how the job actually runs day to day does not decide it. What you signed does. That position comes from the two High Court decisions of February 2022, CFMMEU v Personnel Contracting and ZG Operations v Jamsek.

What Fair Work asks since 26 August 2024

The opposite emphasis. A new definition of employment went into the Fair Work Act on 26 August 2024, and the Fair Work Ombudsman’s summary of the independent contractor changes says the question turns on “the real substance, practical reality and true nature of the working relationship” and on “all parts of the working relationship between the parties. This includes the terms of the contract and how the contract is performed in practice.”

The same page then says why both can be true at once. The new definition “doesn’t affect the meaning of ‘employee’ and ‘employer’ in other existing laws defining employment. For example: tax, superannuation, workers compensation.”

A carefully drafted contract can therefore hold up for tax while the daily reality makes you an employee for workplace relations purposes. Neither answer is wrong. They are answers to different questions.

Which Fair Work test applies depends on who hired you

The newer whole of relationship test can generally only be used by what the legislation calls constitutionally covered businesses. In practice that means the business that hired you is a proprietary limited company.

If the person paying you is a sole trader or a partnership in New South Wales, South Australia, Queensland, Victoria or Tasmania, they are a state referred business, and the older start of relationship test applies instead. That one looks at the arrangement as it stood when the work began.

This is checkable in about ten seconds. Look for an ACN on the invoice or the remittance advice. Same facts, same worker, different test, decided by the structure of whoever is paying you.

There is one opt-out. A contractor earning more than the contractor high income threshold, which is $190,100 from 1 July 2026, can notify the business and use the start of relationship test instead.

The seven things that actually get weighed

The ATO tabulates seven indicia, and leads with a warning worth keeping in mind before you read them: “No single indicium is determinative and they should not be applied as if they are a checklist.”

What is weighed	Points to employee	Points to contractor
Control	The business has the legal right to control how, where and when you work	You choose how, where and when, subject to reasonable direction
Integration	You are contractually required to work as a representative of their business	You provide services to their business and work to further your own
Mode of remuneration	Paid for time worked, per item or activity, or on commission	Contracted to achieve a specific result, usually for a fixed fee
Delegation	No clause lets you delegate. You must do the work yourself	A clause gives you the right to delegate or subcontract
Tools and equipment	They provide most of it, or reimburse you for it	You provide most of it, with no allowance or reimbursement
Risk	They carry the cost of injury or defective work	You carry the cost of injury or defective work
Goodwill	Their business gets the benefit of your work’s reputation	Your own business does

Two of those rows do more work than the rest.

The delegation clause has to be real. The ATO says the clause “must not be a sham and must be legally capable of exercise”. A right to send someone else that the builder would never accept in practice is not a right, and a contract that grants it on paper while the site rules forbid it is doing nothing for you.

Mode of remuneration is where most site arrangements sit. Quoting a price for a job and wearing the loss if it runs long points one way. An hourly rate with a timesheet points the other. An hourly rate on its own does not settle anything, because plenty of genuine contractors charge by the hour, but combined with set hours and their tools it stops looking like a business of your own.

Supplying your own tools sits on the contractor side of the ledger and is also the thing you claim at tax time, which is one of the few places where the classification and the return meet. Our guide to tradie tax deductions covers the claiming side.

Some workers are always employees

Four categories get no test at all. The ATO treats apprentices, trainees, labourers and trades assistants as employees, full stop.

Apprentices and trainees do work alongside recognised training towards a qualification, usually under a formal training agreement registered through a state or territory training authority, and in most cases they are paid under an award.

So a labourer invoicing on an ABN is misclassified on the face of it. No contract wording fixes that, and no amount of agreement between the two of you changes it either. The business owes PAYG withholding and super on those payments from the start of the arrangement.

The super you are owed even if you are a genuine contractor

This is the part with your own money in it, and it survives being a real contractor.

The ATO’s rule on super for independent contractors is that if a business pays you mainly for your labour, you are an employee for superannuation guarantee purposes. It says so directly: “It doesn’t matter if the independent contractor has an Australian business number (ABN).”

Three conditions have to hold:

• The contract is mainly for your labour, meaning more than half its dollar value is labour.
• It is for your personal labour and skills, so payment does not depend on achieving a specified result.
• The work cannot be delegated to someone else.

The super guarantee rate is 12% of qualifying earnings for 2026-27, and since 1 July 2026 it is paid on each payday rather than quarterly. Materials and GST are outside qualifying earnings, so a contract with a big materials component is a different proposition from a labour-only one.

There is an escape hatch, and it explains a lot of what happens on sites. The ATO treats a company, trust or partnership as a contracting relationship for tax and super, because an employee has to be a natural person. Contract through a Pty Ltd and the business paying you owes no super for the person who does the work. That is usually the real reason a builder asks a subbie to incorporate.

Sham contracting, and what it costs

Telling a worker they are a contractor when they are actually an employee can be sham contracting, unless the business can prove it reasonably believed otherwise. The Fair Work Ombudsman’s page on sham contracting sets out two other things that are also illegal: knowingly saying something false to convince an employee to become a contractor doing the same work, and dismissing or threatening to dismiss an employee in order to re-engage them as a contractor doing the same work.

The defence got harder on 27 February 2024. It used to turn on recklessness. Now the business has to prove that when it made the representation, it reasonably believed the worker was a contractor.

Courts can impose penalties per contravention, and the maximums are set out on the same page. The provisions are sections 357 to 359 of the Fair Work Act 2009.

None of that says your own arrangement is unlawful. Plenty of hourly-rate subcontracting is perfectly genuine, and the law is about what was represented and whether the belief behind it was reasonable, not about the rate.

What to do if you think you are on the wrong side of it

Start with the tax and super question, because it has a tool. The ATO’s employee/contractor decision tool asks about your arrangement and returns the ATO’s own answer on the facts you give it, which is more than either regulator will tell you over the phone.

For the workplace relations question, the Fair Work Ombudsman runs an Infoline, with an honest limit stated on its own page: “We are unable to tell you if you are a contractor or an employee.” Neither regulator simply decides it for you, which is why so many arrangements sit unresolved for years.

Workers compensation is a third question again. Every state and territory runs its own scheme with its own test for who counts as a worker, so the answer comes from your state regulator rather than from either of the two tests above.

Two practical things in the meantime. Get the contract in writing and read the delegation clause, because for the tax test the contract is effectively the whole evidence base. And keep the records that show how the work actually ran: your invoices, the tools you supplied, the jobs you went back and fixed at your own cost. Those are what the Fair Work test looks at.

Whichever way it lands, if you have been invoicing on an ABN you have a return to lodge with a business schedule on it. Ours is a fixed $330 for a sole trader with the personal return included, or $440 if you are registered for GST.

Will a Pty Ltd fix it?

For tax and super, incorporating changes the answer outright. The ATO treats a company, trust or partnership as a contracting relationship, so there is no PAYG withholding and no super for the business that hires you.

It does not make a dishonest arrangement honest, and it does not decide the Fair Work question on its own. It also moves you into a different set of rules, including the personal services income rules, which can push the income straight back to you personally and undo most of what the company was meant to achieve. For a labour-only subbie working mainly for one builder, that is a live risk rather than a theoretical one.

What the company actually costs to run and what it saves is a separate calculation, and our guide to sole trader vs Pty Ltd for tradies works through it.

The question is never what you are called. It is what the arrangement actually is, and since August 2024 that has had more than one correct answer depending on who is asking.