Employee, employer and independent contractor: understanding the difference

Understand the relationship before choosing the document

An employer engages an employee in an employment relationship. An independent contractor supplies services through a different arrangement. The distinction matters because rights, responsibilities and potential liabilities may differ. The parties cannot resolve every question simply by choosing the title of the agreement.

A useful review first identifies the business, the dates and the legal question being asked. It then applies the relevant test to the arrangement. This is particularly important where an existing relationship has changed or different periods of work are in issue.

How MAKIN Advisory can assist

• Assess the relevant classification question and the applicable framework.

• Review the contract alongside information about how the work is organised.

• Identify inconsistencies, missing information and practical areas of risk.

• Draft or review agreements suited to the proposed relationship.

• Advise on next steps where a business or worker is concerned about an existing arrangement.

The applicable test comes first

From 26 August 2024, constitutionally covered businesses generally use the whole-of-relationship test for the relevant work. That test considers the substance and practical operation of the relationship as well as the contract. Other situations use a different approach, including certain state-referred businesses, earlier work and applicable opt-out arrangements.

That is why a universal internet checklist can mislead. Identify the framework before deciding how to weigh control, delegation, equipment, financial risk or the expectation of ongoing work. An ABN or the practice of issuing invoices is not a conclusive answer.

Discuss an employee or contractor arrangement

What does a review need?

Prepare the contract and variations, the parties’ identities, relevant dates and a practical description of the work. Explain who sets hours and methods, who supplies equipment, whether someone else can perform the work and how payment and commercial risk operate.

Be specific about the decision you need to make. Engaging a new consultant, responding to a worker’s concern and reviewing an established workforce are different tasks. If the arrangement raises tax, superannuation, payroll tax or insurance questions, those issues may need separate assessment under their own rules and coordination with the appropriate adviser.

Employee and contractor FAQs

Does an ABN make someone a contractor?

No. It is one aspect of the arrangement, not a substitute for the relevant legal test. The rights, obligations and circumstances need to be considered under the framework that applies.

Can both parties agree that the worker is a contractor?

The written agreement matters, but a label does not determine the answer by itself. If the arrangement is employment under the applicable law, calling it contracting does not remove the resulting obligations.

Do all businesses use the same test?

No. The business type, relevant period and any valid opt-out can affect the test. Identify those matters before applying a checklist or relying on advice given for a different business.

Is being able to subcontract decisive?

Delegation rights can be relevant, but the terms and circumstances need examination. Consider what the contract genuinely permits and, where relevant to the applicable test, how the arrangement operates. No single factor should be assumed to answer every case.

Can I fix the issue by replacing the contract?

A new document may help define a future arrangement, but it does not automatically resolve past obligations or make an unchanged relationship different. Review the practical proposal and any historical exposure before treating a revised heading as the solution.

What does advice cost?

Cost depends on the number of arrangements, the period involved, the documents and whether the task includes drafting or addressing a dispute. A brief explanation of the arrangement and your immediate concern helps us discuss a proportionate scope.

Get the arrangement clear from the outset

MAKIN Advisory serves Gold Coast and Brisbane clients remotely, with meetings by appointment. Enquire about classification or contract advice or email sam@makinadvisory.com.au.

Related: Contractor agreements and business terms and employee dismissal advice. Official resources: Fair Work Ombudsman’s whole-of-relationship guidance and opt-out guidance.