Summary
Since 26 August 2024, whether someone is an employee or an independent contractor is decided by the real substance, practical reality and true nature of the relationship — not by what the contract says. The written agreement is still relevant, but it is now one input among many rather than the answer.
That is a deliberate reversal. Two High Court decisions in 2022 had pushed the test firmly towards the terms of the written contract, and for two years a carefully drafted agreement did a great deal of work. The amendment removed that shortcut. If the paperwork says contractor and the day-to-day says employee, the day-to-day now wins.
This guide covers what the new test actually weighs, the opt-out that exists for higher-earning contractors, why superannuation is a separate question you can get wrong even when you are right about everything else, and the practical signals that decide most real cases.
What changed, precisely
The Fair Work Act now requires that the relationship be determined by ascertaining the real substance, practical reality and true nature of the relationship. In doing that, regard must be had to the totality of the relationship — including not only the terms of the contract, but how the contract is performed in practice.
The phrase "how it is performed in practice" is the operative one. It means the evidence is no longer limited to the document. It is the roster, the messages, the invoices, the login records, the induction, the uniform, the equipment — the whole of how the work actually happened.
The signals that decide it
No single factor is decisive; it is the overall picture. But in practice these carry the most weight:
- Control. Not just what is done, but how, when and where. Being told which hours to work, in what order, to a set method, points strongly to employment. Being engaged for an outcome, with the method left to you, points the other way.
- The right to delegate. Can they genuinely send someone else in their place, at their own cost, without needing permission? A real and unfettered right of delegation is one of the strongest contractor indicators. A clause that grants it on paper while the practice is that only that person ever attends counts for very little now.
- Commercial risk. Do they stand to make a profit or a loss? Do they fix defects at their own expense, carry their own insurance, quote for work? An hourly rate with no downside is not commercial risk.
- Tools and equipment. Who supplies the significant items, and who bears the cost of them.
- Integration. Do they appear to the world as part of your business — uniform, email address, business cards, listed on the roster — or as their own?
- Exclusivity and hours. Someone working set shifts for you and no one else, indefinitely, is very hard to characterise as running their own enterprise.
A useful sanity check: describe the arrangement out loud without using the words "contractor" or "ABN". If what comes out is "they work Tuesdays and Thursdays, 9 to 5, at our site, using our gear, doing what we tell them", the label on the contract is not going to save it.
The opt-out for higher earners
There is a genuine carve-out. A worker earning above the contractor high income threshold can be given, or can give, an opt-out notice. Where a valid notice is in effect, the new definition does not apply to that relationship and the pre-amendment position continues.
Two cautions. It applies only above the threshold, which is indexed and must be checked against the current figure. And it is a notice with formal requirements — it is not a clause you drop into a services agreement and forget. Used properly it gives certainty to genuine consulting arrangements; used loosely it gives false comfort.
Sham contracting is easier to prove now
It is unlawful to misrepresent employment as an independent contracting arrangement. There has always been a defence, and the defence was narrowed at the same time.
Previously an employer escaped liability unless they were reckless as to whether the person was an employee. Now the defence turns on whether the employer reasonably believed the person was a contractor. That is an objective standard, and it asks what a reasonable employer in your position would have concluded — not whether you personally never turned your mind to it.
The practical implication is unglamorous but important: not having checked is no longer protective. Write down, at engagement, why you concluded someone is a contractor. Half a page, referring to the factors above. That document is the difference between a reasonable belief and an assumption.
Superannuation is a separate question, and it catches people
This is the most common expensive mistake, and it is independent of everything above.
Under the Superannuation Guarantee (Administration) Act 1992, a person engaged wholly or principally for their labour is treated as an employee for superannuation purposes — even if they are a genuine independent contractor at common law and for Fair Work purposes. If you pay an individual mainly for their personal effort and skill, rather than to produce a result, you likely owe superannuation on the labour component.
Two details that decide most cases. It generally does not apply where you contract with a company, trust or partnership rather than an individual — which is why the entity on the invoice matters. And an ABN is irrelevant to it; having one proves nothing either way.
Under Payday Super this exposure surfaces far faster than it used to, because the reporting cycle is now per payday rather than quarterly. An arrangement that quietly accrued a super liability for three years used to stay invisible for three years.
And so are payroll tax and workers compensation
Two more tests, neither of which follows the Fair Work answer:
- Payroll tax is state and territory law, and each has its own contractor provisions with their own exemptions — days worked, whether services are provided to the public generally, whether labour is ancillary to equipment supplied. A contractor for Fair Work purposes can still be a relevant contract for payroll tax.
- Workers compensation is also state-based and each scheme has its own deeming provisions. Getting this wrong is the one that hurts most, because it surfaces at the moment of an injury.
So a single worker can be a contractor for Fair Work, an employee for super, and a deemed worker for workers compensation — all at once, all correctly. Anyone who tells you there is one answer is describing one of the four tests.
What to do about existing arrangements
- List everyone you pay who is not on payroll. Including the ones who have been there for years, which is where the risk concentrates.
- For each, write down the entity you contract with — individual or company. This decides the super question faster than anything else.
- Apply the practical test, not the paperwork. Control, delegation, risk, tools, integration, exclusivity. Be honest about what actually happens.
- Check the labour test for super separately, and act on it. This is the most likely live liability.
- Check your state payroll tax and workers compensation position.
- Record your reasoning and the date. This is what a reasonable belief looks like in evidence.
- Where the answer is "employee", fix it forward and take advice on the past. A misclassification usually brings unpaid entitlements with it, and under the underpayment regime continuing after you know is materially worse than the original error.
Where record keeping helps
Whichever way a classification lands, the evidence is the same evidence: what hours were worked, at whose direction, at which site, with what approvals. If your contractors clock in on your system, work rostered shifts you set, and are supervised like staff, that record will be read as an employment record — so it is better to know that now than to discover it in a dispute.
Where people genuinely are contractors, keeping their engagement out of your staff rostering and time-tracking is not administrative tidiness; it is part of the substance the test now looks at. NestedClock records who worked, where and when, with an audit trail of adjustments, which is the same evidence base you need for record-keeping compliance generally.
Where to check the detail
The definition sits in the Fair Work Act 2009 as amended by the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024. The superannuation position is in the Superannuation Guarantee (Administration) Act 1992 and the ATO's rulings on who is an employee for super purposes. Payroll tax and workers compensation are state and territory law. The high income threshold is indexed — check the current figure rather than a remembered one.
This article is general information, not legal or tax advice. Classification is fact-specific and the consequences of getting it wrong are cumulative, so it is worth advice on any arrangement you are unsure about.