Contractor or employee?
- Feb 10
- 4 min read
Updated: Apr 20
The Closing Loopholes reforms have redefined how employers must assess whether a worker is an employee or an independent contractor.
From 27 February 2024, changes to the Fair Work Act 2009 mean that employers can no longer rely on the wording of a contract alone. Instead, greater emphasis is placed on the real substance, practical reality and true nature of the working relationship.
What has changed under the Closing Loopholes laws?
The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 introduced significant changes, including:
changes to the definition of employment
a new framework for determining whether a worker is an employee or contractor
new rights for certain independent contractors to challenge unfair contract terms
increased scrutiny and enforcement of sham contracting
The label in your contract is no longer decisive. What matters is how the relationship operates in practice.
The new definition of “employment”
A new definition has been inserted into the Fair Work Act 2009 to clarify the meaning of “employee” and “employer”.
Under this definition, whether a person is an employee depends on the totality of the relationship, including how the arrangement is performed in practice—not just what is written in the contract.
This means the law looks at factors such as:
the level of control over how work is performed
whether the worker is integrated into the business
how they are paid and managed
whether they operate an independent business
,
Even a well-drafted independent contractor agreement will not protect you if, in reality, the worker is treated like an employee.
This is why it’s critical to ensure your agreements are properly structured.
Why this matters for employers
It’s important to regularly review your employer–worker–contractor arrangements to ensure you are meeting your legal obligations.
Regardless of what the written contract might say, if in practice the relationship looks and operates as one of employment, it will be treated as an employment relationship.
This has direct implications for:
minimum entitlements under the National Employment Standards (NES)
modern award coverage and classification
superannuation and taxation obligations
leave entitlements and workplace protections
A handshake deal or undocumented arrangement significantly increases the risk of misclassification and disputes.
Sham contracting risks and penalties
If you incorrectly classify an employee as an independent contractor, you risk breaching the sham contracting provisions under the Fair Work Act 2009.
Penalties can be significant. The maximum penalties for each contravention are:
· $19,800 for individuals
· $99,000 for businesses with fewer than 15 employees
· for businesses with 15 or more employees, the greater of $495,000 or three times the underpayment amount
You may also face additional consequences for breaching taxation and superannuation obligations.
Misclassification is not just a paperwork issue, it can trigger underpayment claims, regulatory action, and significant financial penalties.
Increased enforcement focus
Regulators including the Fair Work Ombudsman (FWO) and the Australian Taxation Office (ATO) have increased their focus on sham contracting.
This reflects a broader shift toward proactive compliance and enforcement across Australian workplaces.
Authorities are no longer waiting for complaints. Employers are expected to proactively review and correct non-compliant arrangements.
What should employers do now?
Reviewing your contractor arrangements should be a regular part of your HR and compliance processes.
As a starting point, you should:
review all independent contractor engagements
assess how the relationship operates in practice
check alignment with the Fair Work Act and relevant obligations
update agreements where required
You can try to determine if your worker is really an independent contractor using information provided on the Fair Work Ombudsman website.
Alternatively, you can seek professional support from an experienced workplace relations specialist.
The bottom line
The distinction between contractor and employee has always been important, but under the Closing Loopholes reforms, the risks of getting it wrong are higher than ever.
A written contract alone is not enough. What matters is the true nature of the working relationship in practice.
If your arrangements haven’t been reviewed recently, now is the time to act.
How WorkPlacePLUS can help
The experienced team at WorkPlacePLUS offers comprehensive Independent Contractor Agreement (ICA) Assessments to help you ensure you’re meeting your employer obligations.
We offer practical, tailored advice to help you reduce risk, maintain compliance, and ensure your workforce arrangements are fit for purpose.
Book your ICA Assessment
For more information or to book your Independent Contractor Agreement Assessment, please contact WorkPlacePLUS today on (03) 9492 0958.
If you’re just setting up your business or practice, our Essential SME HR Toolkit can help you start on the right foot >
FAQ: Contractor vs employee
What is the difference between a contractor and an employee in Australia?
The difference depends on the real substance, practical reality and true nature of the relationship, not just the written contract. Under the Fair Work Act 2009, courts assess the totality of the relationship, including control, integration, and how the work is performed.
What is sham contracting?
Sham contracting occurs when an employer incorrectly treats a worker as an independent contractor instead of an employee, often to avoid paying entitlements such as leave, superannuation, and minimum wages.
Can a contract say someone is a contractor if they are really an employee?
No. Even if a contract labels someone as an independent contractor, they may legally be an employee if the working relationship operates like employment in practice.
What are the penalties for sham contracting?
Penalties can be significant. For each contravention, penalties can reach:
$19,800 for individuals
$99,000 for small businesses
up to $495,000 or three times the underpayment amount for larger businesses
Additional penalties may apply for breaches of taxation and superannuation laws.
How often should contractor arrangements be reviewed?
Contractor arrangements should be reviewed regularly, particularly when:
roles or working arrangements change
new legislation is introduced
contracts are more than 1–2 years old
Regular reviews help ensure ongoing compliance and reduce legal risk.
For more information, please contact us today.
