Have you classified your workers correctly?

Keep in mind the following information is General Advice and is obviously not personalised for your unique needs, objectives or financial situation. Please get in touch with your advisor before taking any action on the below points so they can advise on the appropriateness of this for you.

If businesses don’t correctly distinguish their workers as employees or contractors, it can result in significant penalties, back pay, and compliance issues. Determining whether your workers are employees or contractors affects taxation, superannuation, and workers’ rights. Failure to classify correctly can be costly.

Both the Australian Taxation Office (ATO) and the Fair Work Ombudsman (FWO) actively monitor compliance and administer penalties where misclassification occurs. Understanding the differences in obligations for different worker categories is essential.

Difference Between Employees and Contractors

As an overview and simple summary;

• Employees work in and are part of your business.
• Contractors operate their own business and provide services independently.

However, classification isn’t just about the written contract. Both the ATO and FWO consider the entire working relationship. Courts use a multi-factor test, which includes:

• Subcontracting: Employees generally cannot delegate their work, while contractors can engage others.
• Payment basis: Employees are typically paid for time worked or by piece rate; contractors are paid for achieving a result based on a quote, which may include hourly rates or fixed project pricing.
• Provision of tools: Employees are usually provided equipment by the business or reimbursed; contractors provide their own tools.
• Commercial risk: Employees bear no commercial risk for substandard work; contractors are liable for rectifying defects.
• Direction and independence: Employees follow business directions; contractors have freedom in how they perform work.
• Integration into the business: Employees work within and are part of your business; contractors operate independently and may provide services to multiple clients.

Important: Misclassifying workers can expose your business to fines, back pay of wages and leave entitlements, and other penalties.

For a deeper dive, see our article on Employee vs Contractor Classification.
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Taxation and Superannuation Differences

Incorrectly treating employees as contractors can reduce labour costs illegally, avoid super obligations, and deny employee entitlements. Key differences include:

• PAYG Withholding: Businesses must withhold PAYG from employee wages and remit to the ATO. For contractors, withholding is generally only required if they haven’t quoted an ABN or under a voluntary agreement. Non-compliance can result in penalties and disallowed tax deductions.
• Fringe Benefits Tax (FBT): FBT generally applies to employees, not contractors.

Superannuation:

• Employees must be paid super in line with the Superannuation Guarantee (SG) rules, which will transition to Payday Super from 1 July 2026 (read more here).
• Contractors may also be entitled to super if they are considered deemed employees, meaning the contract is principally for their labour (read more here).

Key Takeaways

• Correctly classifying your workers is essential to avoid penalties, fines, or legal action.
• Misclassification affects tax, superannuation, and workers’ rights.
• With Payday Super coming in July 2026, it’s more important than ever to ensure all workers are classified correctly.

Need help? Reach out to your Morrows advisor

If you’re unsure whether your workers are classified correctly, please speak to your Morrows advisor. We can review your arrangements, ensure compliance, and help prepare your business for the transition to Payday Super.