"Can I just pay them on an ABN?"
Almost always the wrong question — and the law changed in a way that makes the old answer worse. Here is the test that actually applies, and what it costs when the answer is no.
Classification turns on the facts of each engagement and the consequences of getting it wrong are significant. It does not constitute legal, HR, or professional advice and should not be relied on as a substitute for advice specific to your business, workforce, or circumstances.
The short answer
An ABN does not make someone a contractor. Whether a worker is an employee or a contractor is decided by the real substance of the relationship — including how the work is actually performed, not just what the paperwork says. If you control the hours, direct the method, supply the tools and carry the commercial risk, you have an employee.
Getting it wrong is expensive: back-pay, accrued leave, unpaid superannuation, and penalties of up to $495,000 per contravention or three times the underpayment for a business with 15 or more employees.
ABN or TFN?
The document you collect is a consequence of the classification, not a way of choosing it. An employee gives you a tax file number declaration; you withhold PAYG, pay superannuation, accrue leave and issue a pay slip for every pay. A genuine contractor invoices you against an ABN and handles their own tax.
The pattern worth naming: asking a worker to "get an ABN" as a condition of starting is one of the clearest markers of a misclassified role. Genuine contractors already have one, because they were already running a business before they met you.
The whole-of-relationship test
Section 15AA of the Fair Work Act requires you to determine the question by reference to the real substance, practical reality and true nature of the relationship — considering all parts of it, including the terms of the contract and how the contract is performed in practice.
That last clause is the change that matters. It displaced the earlier position under which a comprehensive written contract largely settled the question. If you were advised — accurately, at the time — that a well-drafted contractor agreement was close to decisive, that advice is now out of date. What the arrangement looks like day to day carries real weight again.
What the indicators actually are
No single factor decides it. These are the ones that carry weight:
| Indicator | Points to employee | Points to contractor |
|---|---|---|
| Control over the work | You set hours and method | They decide how and when |
| Delegation | Must do it personally | Can subcontract it |
| Commercial risk | You carry it | They fix defects at their own cost |
| Tools and equipment | You supply them | They supply their own |
| Basis of payment | Paid for time | Paid for a result |
| Integration | Part of your business | Runs their own |
Read the rows together rather than scoring them. A worker on your roster, using your equipment, who cannot send someone else and is paid by the hour is an employee — no matter what the invoice header says.
Sham contracting
Section 357 prohibits misrepresenting an employment relationship as an independent contracting arrangement. There is a defence where the employer proves it did not know and was not reckless as to the true position — but recklessness is a low bar to clear against you, and two common defences are not defences at all: that the worker agreed, and that the arrangement suited both sides.
What it costs to get wrong
- Back-pay of the correct award rates, including penalties and overtime, for the whole period
- Accrued annual and personal leave that was never accrued
- Unpaid superannuation, plus the superannuation guarantee charge, which is not deductible
- Penalties — up to the greater of $495,000 per contravention or three times the underpayment, for a business with 15 or more employees
- Workers' compensation exposure for a worker you never insured
When a contractor is genuine
Plenty of contracting arrangements are entirely legitimate — a bookkeeper with several clients, a tradesperson quoting a job, an agency engaged for a project. What they share is a real business: their own clients, their own tools, their own risk, and the ability to send someone else.
Note that even a genuine contractor can attract a superannuation obligation where the contract is wholly or principally for their labour, and safety duties are owed to contractors too — see contractor and labour-hire obligations.
Common mistakes
- Treating the ABN as the answer. It is a tax registration, not a classification.
- Relying on a contractor agreement alone. Section 15AA looks at how the work is performed in practice.
- Asking a worker to get an ABN to start. A genuine contractor already has one.
- Assuming no super is payable. Labour-only contracts often attract it.
- Thinking consent cures it. The worker agreeing is not a defence under s 357.
- Fixing it quietly. How you correct the arrangement affects what you owe — take advice first.
If you are rostering them, they are probably an employee
Control over hours is one of the strongest indicators there is — and putting someone on a roster is exactly that. RosterElf applies award rates, penalties and loadings to the shifts you schedule, so paying people properly as employees costs you a roster rather than a reconstruction later.
Start free trialGeneral information only, not legal advice. Employee/contractor classification turns on the specific facts of each engagement and the consequences of getting it wrong are significant — take advice, and check the Fair Work Ombudsman's guidance on the whole-of-relationship test and sham contracting.
Other employment law guides
Explore other state-based guides for long service leave, workers' compensation, and payroll tax
Unfair Dismissal
Who can claim, the 21-day limit, the compensation cap and how it is really calculated
SA Long Service Leave
13 weeks after 10 years, pro-rata at 7 years, payment calculations
Victoria Long Service Leave
7-year eligibility, progressive entitlement, portable schemes
QLD Long Service Leave
10-year entitlement, 7-year pro-rata, QLeave portable schemes
Victoria Workers' Compensation
WorkCover claims, weekly payments (PIAWE), treatment expenses
SA Workers' Compensation
ReturnToWorkSA claims, income support, return to work planning
ABN, employee or contractor FAQ
- Only if they are genuinely running their own business. Having an ABN does not make someone a contractor — the law looks at the real substance and practical reality of the relationship, not the paperwork. If you control when and how they work, they use your equipment, they cannot delegate the work and they carry no commercial risk, they are almost certainly an employee whatever the invoice says. Asking a worker to get an ABN as a condition of the job is a strong warning sign in itself.
- It depends on what they are, not on what is more convenient. An employee gives you a tax file number declaration; you withhold PAYG, pay superannuation, accrue leave and issue pay slips. A genuine contractor invoices you with an ABN and generally handles their own tax — though you may still owe them super if the contract is wholly or principally for their labour. The document you collect follows the classification; it does not create it.
- For separate, genuinely distinct work, yes — someone employed in your café could separately contract to build your website through their own business. But splitting the same work into an employed portion and an invoiced portion does not survive scrutiny, and it is one of the arrangements the Fair Work Ombudsman looks for.