Staying on the right side of the law is extremely important as a small business. That lesson is easy. The tricky part, however, is knowing the difference between right and wrong with your industry’s rules and regulations.

Australian workplace legalities can be difficult to navigate: whilst you might think you’re doing the right or logical thing, it could actually be breaching the laws of your industry. One simple error that is commonly made, is employers confusing an employee with a sub-contractor.

Sound ridiculous? Not quite. Whilst both are employed in your service, the ways in which they are paid in regards to tax and superannuation, as well as how their rights in regards to work sharing, equipment, and risk-taking are vastly different.

Here’s what you need to know about the differences between an employee and a sub-contractor.

How they can manage their workload.

An employee… is not allowed to delegate, divide, or subcontract their workload to anyone else. Simply put, they can’t pay someone else to do their work.

A contractor… is allowed to delegate, divide, or subcontract their workload to whoever they like – and pay them for it.

How you pay them.

An employee… is paid by unit of time (hourly, weekly, monthly), or by item/activity (small projects).

A contractor… is paid in an overall project fee, based on an initial quote you supply.

What equipment they use.

An employee… will either use equipment that you personally provide them, or equipment they have purchased using your money.

A contractor… must supply and use equipment that they have purchased and brought to the site.

Risk-taking and control over their work.

An employee… must not take any risks outside of the scope of work you’ve provided, as your company is legally responsible for their health and safety. If you do think they are taking a risk, you have the right to cease their work, temporarily or permanently.

A contractor… is allowed to take whatever risks they see fit, as you are not legally responsible for their health or safety. They also have the right to perform these risks outside of your control.


An employee… works for you, under your instruction, and is paid by you as part of your business. They aren’t allowed to advertise their services within your company, nor are they considered autonomous from your company’s policies.

A contractor…. Is a separate business. They have full control over who they advertise to and where, and are paid in a business-to-business arrangement.

As you can see, the differences between an employee and a sub-contractor are actually quite dramatic. As are the penalties for confusing one with the other.

According to the ATO, it is illegal for a company to treat their employees as contractors – accident or not.

Businesses that do this are:

  • not meeting their tax and super obligations
  • denying workers their employee entitlements
  • illegally reducing their labour costs and gaining an unfair advantage over their competitors.[1]

The penalties for treating an employee as a contractor or visa versa are a range of charges, including PAYG withholding penalty (for failing to take tax from worker payments), a super guarantee charge (made up interest, admin fee, and the super payments not made. Oh, and an additional super guarantee charge of up to 200%.

It’s an expensive mistake to make.

If you want more information about how to determine whether your work is an employee, or a subcontractor, head to the ATO’s Business page where they will give you all the details, as well as who to call if you suspect a company of deliberately passing off an employee as a subcontractor.

Do your research and stay on the right side of the law when it comes to your business. Whilst it may seem like you’re saving money short term by doing the dodgy – you’ll end up costing your business in the long run. Learn how GoGetta can help your business with our range of tools and calculators.