A written contract that says "contractor" carries far less weight than most business owners assume. The ATO looks at the whole working relationship, not the label on the paperwork, and getting the call wrong can mean super guarantee charge, PAYG withholding and penalties land on you well after the work is done.
What actually matters
The ATO's guidance points to the substance of the arrangement. An employee generally serves in your business and works as part of it. An independent contractor generally runs their own business and provides services to yours. No single factor decides it on its own, so weigh the whole picture:
- Control. Do you direct how, when and where the work is done, or does the worker decide that themselves?
- Tools and equipment. Who supplies them, you or the worker?
- Ability to delegate. Can the worker send someone else to do the job, or must they do it personally?
- Risk. Who wears the cost of fixing defective work, you or the worker?
- Integration. Does the worker operate as part of your business, or as a separate business supplying it?
Why it costs real money to get wrong
Misclassify an employee as a contractor and the exposure is not limited to back pay. You can owe unpaid super guarantee charge, which is not tax deductible and carries interest, along with PAYG withholding you should have taken out of their pay. With payday super now checking contributions every pay cycle and the ATO actively data matching, these gaps surface faster than they used to.
What to do
Before your next new engagement, or for anyone currently on your books as a contractor, run the arrangement against the factors above with fresh eyes, not the label in the contract. The ATO's employee or independent contractor decision tool works through the same questions and gives you a documented result to keep on file. If the answer is genuinely unclear, get advice before the arrangement runs for another quarter.