July 2025
Worker Classification
The contractor vs employee debate: a tax perspective
When engaging workers, businesses are responsible for ensuring that they comply with the relevant laws and obligations, including employment taxes. Failure to do so can result in significant financial and legal consequences, such as fines, lawsuits, and reputational impact to the business. With an increased level of activity by State and Federal revenue authorities, coupled with recent changes in the Courts’ views, the spotlight has never been brighter on worker classification and associated obligations. We are aware that revenue authorities have data sharing arrangements and are able to analyse vast amounts of data from varying sources to identify potential risks. In such an environment, it is crucial that businesses understand the risks as non-compliance can create uncommercial outcomes and, if not detected in time, can be costly to rectify.
Employee or contractor? Two recent High Court 1 decisions held that the terms of a contract should take precedent over the subsequent conduct of the parties when distinguishing whether a worker should be considered an employee or an independent contractor. These decisions confirm that in the first instance, the nature of the relationship is determined by the legal rights set out in a written contract between the parties. If there is a valid written contract between the parties which is not considered a sham or otherwise legally ineffective, the courts have stated that there is no need to look beyond the contract in order to determine the nature of the relationship. From this, the Australian Taxation Office (“ATO”) released Taxation Ruling 2023/4 and Practice Compliance Guideline 2023/2 to provide guidance on the potential tax obligations for businesses engaging contractors. A non-exhaustive list of indicia include: Indicia
Comment
Control
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Control is a key indicator of employment, but also whether the principal actually exercises such control.
Hourly remuneration
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While not necessarily a strong indicator (in its own right) of an employer-employee relationship, the ATO Commissioner still errs on viewing an hourly remuneration structure as more akin to an employer-employee relationship.
Ability to subcontract / delegate
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The ability to subcontract and delegate is generally inconsistent with an employeremployee relationship.
Results contract
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When the substance of a contract focusses on achieving a specified result, it strongly (though not conclusively) indicates a contract for services and not an employeremployee relationship.
Provision of tools and equipment
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The provision of assets, equipment and tools by a worker, along with the incurring of expenses, can indicate that the worker is an independent contractor.
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Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; ZG Operations Australia Pty Ltd v Jamsek & Ors [2022] HCA 2. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.
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