The key difference
An employee works in and as part of a business, represents that business to customers, and receives the full suite of statutory entitlements under the Fair Work Act 2009: annual leave, personal leave, notice of termination, redundancy pay, and more.
An independent contractor runs their own business and provides services to another person or business. Contractors generally negotiate their own fees and working arrangements, can work for multiple clients, and bear their own financial risk.
The label the parties put on the arrangement does not determine the legal reality. Calling someone a contractor, requiring them to get an ABN, or having them issue invoices does not make them a contractor in law. The Fair Work Ombudsman is explicit: classification depends on a number of factors relating to the real nature of the relationship.
Fair Work Ombudsman, Independent contractors (updated October 2025). Legislative reference: Fair Work Act 2009 (Cth) ss.13-14, 15AA-15AC.
Which test applies to you
From 26 August 2024, the test used to classify a worker as a contractor or employee depends on the type of business engaging them:
| Business type | Test that applies |
|---|---|
| Constitutional corporation (any business with “Pty Ltd” or “Ltd” in its name) | Whole of relationship test (from 26 Aug 2024) |
| State referred businesses (sole traders, partnerships, unincorporated entities in NSW, VIC, QLD, SA, TAS) | Start of relationship test |
The whole of relationship test considers the real substance, practical reality, and true nature of the relationship, including both the contract terms and how the contract is actually performed in practice.
The start of relationship test focuses on what the parties agreed to at the start of the engagement, as set out in the contract (written or verbal). If the contract has been varied by agreement, those changes are also considered.
Under the whole of relationship test, if how the contract is performed in practice has drifted significantly from what was agreed at the start, your classification may have shifted from contractor to employee. Review your arrangements if your working conditions have changed since you signed the contract.
The 6 factors courts consider
No single factor is decisive. Courts and the Fair Work Commission weigh all of the following together when applying either test:
| Factor | Employee indicator | Contractor indicator |
|---|---|---|
| Control over work | The business directs how, where, and when the work is done | The worker decides how the work is done; the client specifies the result, not the method |
| Financial risk | Worker bears no risk; paid regardless of profit or loss | Worker carries profit/loss risk; personally liable for defective work |
| Tools and equipment | Business provides tools, or pays a tool allowance | Worker supplies and pays for their own tools and equipment |
| Ability to delegate | Must perform work personally; cannot send a substitute | Contract includes a genuine, exercisable right to delegate or subcontract |
| Hours of work | Hours are set by the employer | Worker sets their own hours to complete the task |
| Expectation of continuity | Ongoing, open-ended engagement | Engaged for a specific task or project, with no expectation of ongoing work |
Having an ABN and sending invoices are administrative arrangements. They have no legal effect on whether you are classified as an employee or contractor. Courts look at the substance of the working relationship, not the paperwork.
Sham contracting
Sham contracting occurs when a business tells a worker they are an independent contractor when they are actually an employee, and the business does not reasonably believe the worker is a contractor. It is illegal under the Fair Work Act 2009.
It is also illegal to:
- Knowingly make a false statement to convince an employee to become a contractor to do the same (or mostly the same) work, or
- Dismiss or threaten to dismiss an employee in order to re-engage them as a contractor doing the same work.
The maximum civil penalties per contravention (sourced from the Fair Work Ombudsman):
| Who | Maximum penalty |
|---|---|
| Individuals | $19,800 |
| Businesses with fewer than 15 employees | $99,000 |
| Businesses with 15 or more employees | $495,000 |
If you believe you are in a sham contracting arrangement, contact the Fair Work Infoline on 13 13 94 (Monday to Friday, 8am to 5:30pm) or seek independent legal advice.
Fair Work Ombudsman, Sham contracting (updated October 2025). Legislative reference: Fair Work Act 2009 (Cth) ss.357-359, 539.
What you may be owed if reclassified as an employee
If a court or tribunal finds that a worker has been an employee all along, they are entitled to all NES entitlements calculated from the actual start date of the working relationship. This can include:
- Annual leave: 4 weeks per year under s.87, paid out for each year worked
- Personal/carer's leave: 10 days per year under s.96
- Public holiday pay: for days worked on public holidays
- Notice of termination: or payment in lieu under s.117
- Redundancy pay: if applicable under ss.119-121
- Superannuation: at the Superannuation Guarantee rate for all periods of employment
- Award entitlements: if a modern award covered the work performed
The Fair Work Ombudsman can investigate and pursue recovery of unpaid entitlements. Limitation periods mean claims can potentially extend back up to 6 years in some circumstances.
Use the leave calculator to estimate accrued annual leave over any period of employment.
Key takeaways
- The label on the contract does not determine whether someone is a contractor or employee. Courts look at the real substance of the relationship using six factors: control, financial risk, tools, delegation, hours, and continuity.
- From 26 August 2024, businesses with “Pty Ltd” or “Ltd” in their name must use the whole of relationship test, which also considers how the contract is performed in practice (ss.15AA-15AC).
- Sham contracting is illegal under ss.357-359 of the Fair Work Act 2009. Penalties reach $495,000 per contravention for large businesses.
- Workers reclassified as employees are entitled to back-pay for all NES entitlements from the start of the engagement, including annual leave, personal leave, notice, redundancy, and superannuation.
Author & reviewer
Sarah has spent over a decade advising Australian SMBs on Fair Work, NES compliance, and payroll. Based in Sydney, she has worked across hospitality, retail and professional services.