Hiring someone as a contractor when the law says they are really an employee is one of the most expensive mistakes a small Australian business can make. Back-pay claims, unpaid super, penalties under the Fair Work Act 2009 and the Independent Contractors Act 2006, and ATO PAYG/super shortfalls all stack on top of each other. The label on the contract does not save you.
How the law actually decides
Until recently the High Court used a fact-by-fact “multifactor” test. Since the Personnel Contracting and Jamsek decisions (2022), the analysis is much more focused on the terms of the written contract — but the substance still controls, and the Fair Work amendments (Closing Loopholes) reintroduced a “real substance, practical reality and true nature” test for many provisions from 2024.
Key indicators of a true independent contractor:
- Genuine business of their own — ABN, own clients, own tools, own insurance
- Right to delegate work to others
- Paid for a result, not for hours worked
- Bears commercial risk — fixes mistakes at own cost
- Controls how the work is done
- Provides own equipment
Indicators that the person is really an employee, regardless of label:
- Works set hours under your direction
- No right to delegate
- Paid by the hour or week
- Uses your equipment, premises and systems
- Looks like part of your business to outsiders
- No genuine commercial risk
What sham contracting actually costs
Section 357 of the Fair Work Act prohibits misrepresenting an employment relationship as a contracting one. Penalties currently sit at up to $93,900 per contravention for corporations and $18,780 for individuals. On top of that you owe back-pay (wages, leave, super, allowances), interest, and ATO superannuation guarantee charge. A single misclassified worker over three years can easily hit $80,000 in liabilities.
What a proper Independent Contractor Agreement does
- Defines the deliverable — a result, not hours
- Confirms ABN, GST status, and own-business indicators
- Allows delegation
- Allocates IP, confidentiality and insurance properly
- Excludes leave entitlements, sets payment-on-invoice terms
- Documents the genuine commercial risk allocation
- Includes Closing Loopholes-aware language so the practical-reality test is satisfied
When you need an Employment Agreement instead
If the work fails the contractor indicators above — fixed hours, no delegation, paid by time, integrated into your business — the right document is an employment agreement under the relevant award or enterprise agreement. Trying to dress that up as a contractor relationship is the trap.
The flat fee
Claim Done’s Independent Contractor Agreement is $79. The wizard asks about the work, the deliverable, payment terms, IP, confidentiality and insurance — and produces a Closing Loopholes-aware agreement that documents a genuine contracting relationship.
Next step
If you are not sure which side of the line a worker falls on, document the relationship properly with the right agreement before money starts flowing. Fixing it after a Fair Work or ATO audit is an order of magnitude more expensive.