27 October 2025
Understanding whether someone is an employee or an independent contractor is important for both employers and employees. The distinction affects tax obligations, superannuation, insurance and workplace rights, and getting it wrong can lead to serious legal and financial consequences.
The Key Difference: Control and Independence
At its core, the main difference between an independent contractor and an employee is the degree of control exercised by the employee over the worker.
An employee works under the direction and control of their employer. The employer determines how, when and where the work is done. Independent contractors, on the other hand, run their own business. They decide how to perform their work, often using their own tools and equipment, and can usually work for multiple clients at once.
The Multi-Factor Test
Australian Courts use a ‘multi-factor test’ to determine the true nature of the relationship. No single factor is decisive, and Courts will consider the real substance, practical reality, and totality of the relationship. This test was influenced by the High Court decisions of CFMMEU v Personnel Contracting Pty Ltd (2022) and ZG Operations v Jamsek (2022), which looked at the following non-exhaustive factors:
Employee vs Independent Contractor
| Factor | Employee | Independent Contractor |
|---|---|---|
| Level of Control | Employer directs how work is done. | Worker decided how work is done. |
| Method of Payment | Regular wage or salary. | Paid per job or project, often by invoices issued by the contractor. |
| Provision of Equipment | Employer provides the employee tools and equipment. | Contractor provides their own tools and equipment. |
| Work Hours | Hours are decided by the employer. | Contractor decides their own work hours. |
| Leave Entitlements | Employee is entitled to paid leave (annual, sick etc.) | Contractor has no leave entitlements. |
| Tax and Super | Employer deducts tax and pays super. | Contractor pays own tax and super. |
| Business Risk | The employer bears profit and losses. | The contractor bears profit and losses. |
CFMMEU v Personnel Contracting Pty Ltd (2022) and ZG Operations v Jamsek (2022) emphasised that a written contract should be used as the primary source in determining the nature of the relationship. However, amendments in Fair Work Legislation Amendment (Closing Loopholes No 2) Act 2023 (Cth) note that while the terms of a written contract are significant, the factors considered above are also of crucial importance.
Why Does It Matter?
For employers, misclassifying an employee as an independent contractor (known as “sham contracting”) might breach the Fair Work Act 2009 (Cth) and result in penalties. Employers might also be liable for unpaid superannuation and leave entitlements.
For employees understanding the distinction ensures they receive the correct rights and entitlements. For contractors, understanding the distinction ensures they plan for their own superannuation, tax and insurance obligations.
What To Do If You Are Unsure or Need Help?
The line between an employee and independent contractor can be very unclear and highly dependent on the circumstances of a matter. For tailored advice on how these laws might impact you, please contact DFG Legal on 08 9367 3331 or admin@dfglegal.com.au.
