The ATO recently issued 9 guides on the distinction between employees and contractors (the Guides).

The Guides have some key messages for organisations:

  • they help determine if a worker is an employee or a contractor;
  • they require organisations to look at the relationship as a whole;
  • the ATO may impose penalties if an organisation applies the incorrect treatment.

New ATO Guides, and why they are important

At the end of July, the ATO released 9 guides and facts sheets to help organisations determine whether its workers are employees or contractors.

The distinction between an employee and a contractor is important as an organisation will have different tax and superannuation obligations depending on whether its workers are employees or contractors.

The Guides have been released in addition to the ATO’s Employee/contractor decision tool, which allows organisations to answer a set of questions online to gain further guidance as to whether a worker is an employee or contractor.

You can access the Employee/contractor tool here.

What should an organisation consider when working out if a worker is an employee or contractor?

An organisation must consider the whole of its relationship with the worker when determining whether the worker is an employee or a contractor. The Guides set out a number of considerations.

The table below, adapted from the Guides, sets out 6 key factors that will help an organisation determine whether a worker is an employee or contractor.

Factor Employee Contractor
  The worker is more likely to be an employee if they are ‘part of your organisation’. The following facts indicate the worker is an employee. Running his or her own organisation and providing services to your organisation.
Ability to sub-contract/delegate The worker cannot pay somebody else to do the work. The worker is free to sub-contract the work.
Basis of payment The worker is paid on the basis of:
time worked;
price per item or activity;
The worker is paid for the result achieved, usually based on a quote.
Equipment, tools and other assets Your organisation provides or pays for all or most of the equipment, tools and other assets which the worker uses. The worker provides all or most of the equipment, tools and other assets.
Commercial risks Your organisation is legally responsible for:
the work performed by the worker; and
takes the commercial risks of the results.
The worker:
is legally responsible for his or her work,
is liable for the cost of any rectification; and
takes the commercial risks for the work.
Control over work Your organisation directs and controls the work which the worker performs. The worker has a degree of flexibility in the way the work is performed subject to the terms of the engagement.
Independence The worker does not operate independently of your organisation. The worker operates his or her own organisation independently from your organisation. The worker is free to accept or refuse additional work.

Do the Guides provide examples of the distinction?

Yes, the Guides contain a number of scenarios demonstrating the distinction between an employee and a contractor. These scenarios are primarily set out in the following guides:

  • ‘How to determine if workers are employees or contractors’; and
  • ‘Know the difference between employees and contractors’.

The scenarios cover a broad range of sectors, including domestic painting, cleaning, road transport and information technology.

Myths and reality

Myth: Common misconceptions about contractors

The ATO identifies a number of misconceptions about circumstances that people may consider automatically make a worker a contractor. For example, the Guides point out that even if the following factors are met, the relevant worker could still be an employee:

  • the worker has an ABN;
  • the worker submits an invoice for their work;
  • there is a prevailing industry practice; or
  • specialist skills or qualifications may be required.

Myth: Building and Construction

The ATO issued a guide tailored to the building and construction industry. In that guide, the ATO identifies the following further characteristics that, in that sector, do not alone make a worker a contractor. For example, it is not determinative that:

  • the work is project based;
  • the worker is only required for a defined period of time; or
  • the worker has previously worked as a contractor on the same job.

Reality: Common employees

There are also some classes of workers whom the ATO considers will always be defined as employees due to the characteristics of their role. These include apprentices, trades assistants and labourers — regardless of whether they are skilled, unskilled or semi-skilled.

Getting it right


The Guides are part of a combined ATO strategy of education and enforcement aimed at preventing organisations from incorrectly treating employees as contractors. As well as providing guidance as to the correct definition of a contractor, the Guides remind organisations of the penalties that apply if an employee is incorrectly treated as a contractor.

These penalties include:

  • PAYG withholding penalties of up to 100% of the amount that should have been withheld;
  • interest charges; and
  • superannuation guarantee charges including superannuation shortfall amounts and applicable interest and administration fees.

Practical tools

The ATO cautions organisations against giving in to a worker who demands to be treated as a contractor. In that case, the ATO encourages organisations to instead refer the worker to the ATO’s Employee/contractor decision tool and the Guides. The ATO also encourages an organisation’s competitors to report concerns about incorrect treatments of workers.

Contracting with an employee or contractor

An organisation should consider the Guides and the ATO’s Employee/contractor decision tool before finalising the terms on which it engages any worker.

An organisation can arrange a contract with the employer or contractor using either the Cleardocs Standard Employment Contract or the Independent Contractor Agreement, whichever is relevant, to set out the terms of the worker’s engagement. Both of these agreements can be extensively tailored to meet the needs of the organisation and the individual worker.

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