• Myths and facts

    When working out whether your worker is an employee or contractor, make sure you don't get caught out by the common myths around:

    Having an ABN

    Myth: If a worker has an ABN they're a contractor.

    Fact: Having or quoting an ABN makes no difference to whether a worker is an employee or contractor for a job.

    Businesses sometimes request or pressure a worker who is an employee to obtain an ABN in the belief this will make the worker a contractor. Often these businesses attempt to disguise the employment arrangement and make it look like contracting to avoid their PAYG withholding and super obligations.

    If the working arrangement is employment, whether the worker has or quotes an ABN will not make the worker a contractor.

    To correctly work out whether a worker is an employee or contractor, you need to look at the whole working arrangement and the specific terms and conditions under which the work is done.

    Common industry practice

    Myth: Everyone in my industry takes on workers as contractors, so my business should too.

    Fact: Just because 'everyone' in an industry treats workers as contractors doesn't mean they have got it right.

    Ignore common industry practice when determining whether your worker is an employee or contractor.

    Short-term work

    Myth: Employees cannot be used for short jobs or to get extra work done during busy periods.

    Fact: The length of a job (short or long duration) or regularity of work makes no difference to whether a worker is an employee or contractor.

    Both employees and contractors can be used for:

    • casual, temporary, on-call and infrequent work
    • busy periods
    • short jobs, specific tasks and projects.

    To correctly determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and the specific terms and conditions under which the work is done.

    80% rule

    Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.

    Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and how a contractor:

    • reports their income in their own tax return
    • determines if they can claim some business-like deductions.

    It's not a factor a business considers when they work out whether a worker is an employee or contractor.

    Past use of contractors

    Myth: My business has always used contractors, so we don't need to check whether new workers are employees or contractors.

    Fact: Before engaging a new worker (and entering into any agreement or contract), a business should always check whether the worker is an employee or contractor by examining the working arrangement.

    Unless a working arrangement (including the specific terms and conditions under which the work is done) is identical to a previous arrangement you've already checked, the outcome could be different.

    If you wrongly determine that a worker is a contractor, continuing to rely on this decision would mean the business is incorrectly treating all future workers as contractors when they are employees.

    Registered business name

    Myth: If a worker has a registered business name, they're a contractor.

    Fact: Having a registered business name makes no difference to whether a worker is an employee or contractor for a particular job.

    Just because a worker has registered their business name does not mean they will be a contractor for every job or working arrangement.

    Contracting on different jobs

    Myth: If a worker is a contractor for one job, they will be a contractor for all jobs.

    Fact: The working arrangement and specific terms and conditions under which the work is done will determine whether a worker is an employee or contractor for each job.

    Depending on the working arrangement, a worker could be an:

    • employee for one job and a contractor for the next job
    • employee and a contractor if completing two jobs at the same time for different businesses.

    Paying super

    Myth: My business should only take on contractors so we don't have to worry about super.

    Fact: You always need to look at the working arrangement and the specific terms and conditions under which the work is done to work out whether a worker is an employee or contractor.

    You can't decide to treat a worker as a contractor when they're an employee.

    In any event, businesses may be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the person's labour, you have to pay super contributions for them.

    Specialist skills or qualifications

    Myth: Workers used for their specialist skills or qualifications should be engaged as contractors.

    Fact: If a business takes on a worker for their specialist skills or qualifications it doesn't automatically mean they're a contractor.

    A worker with specialist skills or qualifications can be either an employee or contractor depending on the terms and conditions under which the work is done.

    Qualifications or the level of skill a worker has (including whether they are 'blue collar' or 'white collar') makes no difference to whether a worker is an employee or contractor.

    Worker wants to be a contractor

    Myth: My worker wants to be a contractor, so my business should take them on as a contractor.

    Fact: Just because a worker has a preference to work as a contractor doesn't mean your business can engage them as a contractor.

    Whether a worker is an employee or contractor is not a matter of choice, but depends entirely on the working arrangement and the specific terms and conditions under which the work is done.

    If you give into pressure and agree to treat an employee as a contractor, you can face penalties and charges for not meeting your tax and super obligations.

    See also:

    Using invoices

    Myth: If a worker submits an invoice for their work, they're a contractor.

    Fact: Submitting an invoice for work done or being 'paid on invoice' doesn't automatically make a worker a contractor.

    To correctly determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is done.

    If, based on the working arrangement, a worker is an employee, submitting an invoice or being paid on the basis of an invoice will not make the worker a contractor.

    Contracts

    Myth: If a worker's contract has a section that says they are a contractor, then legally they're a contractor.

    Fact: If a worker is legally an employee, a contract saying the worker is a contractor will not make the worker a contractor at law.

    Businesses and workers will sometimes include specific words in a written contract to say that the working arrangement is contracting in the mistaken belief that this will make the worker (who is an employee) a contractor at law.

    If a worker is legally an employee, a contract specifying the worker is a contractor makes no difference and will not:

    • override the employment relationship or change the worker into a contractor
    • change the PAYG withholding and super obligations a business is required to meet.

    See also:

    Last modified: 22 Feb 2016QC 33185