Contractor vs Employee: Key Differences Explained

By Mohammad Barzegar, Director, TQN Personnel · Reviewed by Mohammad Sakhvidi · Updated October 2026 · 8 min read

In the contractor vs employee question, the real working relationship decides the answer, not the label in the contract and not an ABN. An employee works in the business under direction and is paid wages, while a genuine contractor runs their own business and delivers a result. This guide explains the multi-factor test, the pay and leave differences and the risks of misclassification.

Contractor vs employee: how the test works

No single factor decides the contractor vs employee question. Look at the whole relationship, in real terms, including how work is actually done day to day.

Factor	Points to employee	Points to contractor
Control	The business decides when, where and how the work is done.	The worker decides how the result is delivered.
Equipment and expenses	The business supplies tools, vehicles and uniforms.	The worker supplies their own tools and bears the costs.
Result or hours	Paid for hours worked under a roster.	Paid for a result or a job, by invoice.
Other clients	Works for one business only.	Offers services to several clients.
Integration	Wears the uniform and appears as part of the team.	Operates under their own business name.
Delegation	Must do the work personally.	Can send a replacement or hire help.
Test	Fair Work Ombudsman and ATO tools	Outcome turns on the facts

Is a contractor an employee?

Sometimes. A person called a contractor is an employee in law if the working relationship is really one of employment. Most private-sector workers are in the national system under the Fair Work Act 2009 (Cth), and NSW state public sector employees, and some local government employees, are in the NSW state system.

• Ask whether the worker could be sacked and replaced like an employee, or whether the contract is for a result.
• Look at the day-to-day reality, since a signed contractor agreement does not override how the work really happens.
• Check whether the worker has a genuine, independent business with other clients and its own insurance.
• Use the ATO employee/contractor tool and the Fair Work Ombudsman guidance when you are unsure.

Independent contractor vs employee: pay and entitlements

The gap is not just the rate. It is the entitlements that come with employment, which a genuine contractor must price in themselves.

Item	Employee	Independent contractor
Minimum pay	At least the award or national minimum, $26.44 per hour from 1 July 2026	Negotiated price, not set by the minimum wage rules
Annual leave	4 weeks a year for full-time, pro rata for part-time	None
Personal leave	10 days paid a year for full-time	None
Super	12% of ordinary time earnings in 2026-27	Usually not, though some contracts mainly for labour can attract super, so check with the ATO
Tax	Employer withholds tax and reports through Single Touch Payroll	The contractor handles their own tax
Payslips and records	Payslip within 1 working day of payday, records kept for 7 years	Tax invoice from the contractor
Workers compensation	Employer covers through icare in NSW	Contractor arranges their own cover, unless deemed a worker

ABN vs TFN: what each one means

An ABN identifies a business and a TFN identifies a person, but neither decides status.

• A worker can have an ABN and still be an employee, if the relationship is employment.
• An employee gives their employer a TFN declaration so tax can be withheld correctly.
• A contractor gives an ABN and invoices for the work done.
• Never ask a worker to get an ABN so you can avoid paying leave or super.

Contract vs permanent: what changes

Contract often means fixed-term and permanent means ongoing, but both can be employees.

• A fixed-term or casual employee is an employee, not a contractor, and is covered by the award or agreement.
• A permanent employee is ongoing, full-time or part-time, with leave and notice entitlements.
• A genuine contractor is engaged for a result under a commercial contract, and is not an employee at all.
• A labour hire worker is employed by the provider, as casual, part-time or permanent, and the host is a client.

Misclassification and sham contracting

Misclassification means treating an employee as a contractor. If it is deliberate, it is sham contracting, which is illegal. A site manager may be tempted to put a regular worker on an ABN, but the real relationship still governs.

• Back pay for leave, award rates and super can be owed if the worker is found to be an employee.
• The Fair Work Ombudsman can investigate, and workers can lodge complaints for free.
• Never suggest someone becomes a contractor, or casual, to save costs.
• Seek advice from an employment lawyer if the status is unclear.
• Workers who suspect they are misclassified should keep invoices, rosters and messages showing who directs the work.
• Employers who find a mistake should correct it early, back-pay what is owed and record the change in writing.

Employee vs independent contractor: what employers must do

• Test each worker against the multi-factor checklist before signing a contractor agreement.
• Pay employees at least the award or national rate, with super at 12% so it reaches the fund within 7 business days of payday.
• Issue payslips within 1 working day of payday and keep time and wage records for 7 years.
• Report payroll information to the ATO through Single Touch Payroll on or before each payday.
• Take out workers compensation cover with icare where required.
• Review long-running contractor arrangements every year, in case the relationship has changed.

Related employment types to compare

• Compare casual vs part-time work for ongoing employees.
• Check part-time minimum hours in the award.
• Read salary vs wages for the pay type.
• Read about casual loading for the casual rate.
• Read what remuneration includes.
• See blue collar vs white collar roles and what a secondment is.

Common mistakes to avoid

• Treating an ABN as proof that a worker is a contractor.
• Paying a regular worker as a contractor while directing hours, tools and tasks.
• Forgetting that labour hire workers are employees of the provider.
• Skipping super and leave because a signed agreement says contractor.
• Leaving a contractor arrangement unreviewed after the work becomes full-time.

Contractor vs employee FAQ

Is a contractor an employee?

Not if the contractor genuinely runs their own business. But a worker called a contractor is an employee if the real relationship is employment. An ABN does not decide it, so test the whole relationship.

Does an ABN make you a contractor?

No. An ABN identifies a business for tax purposes only. The Fair Work Ombudsman and the ATO look at control, equipment, result and independence, so use their tools if you are unsure.

Do contractors get annual leave?

No. Genuine contractors do not get annual leave, personal leave or payslips. Employees get the NES, including 4 weeks of annual leave a year for full-time staff, pro rata for part-time.

What is sham contracting?

Sham contracting is treating an employee as a contractor to avoid entitlements. It is illegal. Workers can contact the Fair Work Ombudsman on 13 13 94 for free advice.

Next step

This is general information, not legal, tax or financial advice, so check the Fair Work Ombudsman, the ATO or an employment lawyer for your situation. Start with our guide to casual vs part-time employment, or talk to TQN Personnel about host employer services.

Related guides

• Casual vs part-time
• Part-time minimum hours
• Salary vs wages
• Casual loading
• What is remuneration
• Blue collar vs white collar
• What is a secondment