Employee or Contractor – Understanding the Difference

Jayne Kilsby
5 days ago
2 min read

Getting the classification right between an employee and an independent contractor is one of the most common areas of confusion for business owners — and it’s one that can have serious financial and compliance consequences if handled incorrectly.

At Bookkeeping N More, we often see businesses engaging someone for “contract work” and assuming that issuing an ABN or invoice automatically makes them a contractor. But under the Fair Work Act 2009 and the Independent Contractors Act 2006, that’s not always the case.

It’s not about what you call the arrangement — it’s about the nature of the working relationship.

Courts and regulators always look at the whole picture, not just one factor. Below are some common indicators to help you understand the key differences.

✅ Indicators of an Employee

A worker is generally considered an employee if they:

Have their work directed and controlled by their employer
Work regular or standard hours (though casuals may vary week to week)
Have an ongoing expectation of work
Bear no financial risk — the employer covers insurance and liability
Are provided with tools or receive a tool allowance
Have income tax deducted by their employer
Are paid regular wages or a salary
Are entitled to paid leave (annual, personal, etc.)

👉 In short: An employee works in your business, as part of your team.

🔧 Indicators of an Independent Contractor

A worker is usually an independent contractor if they:

Control how the work is done and may hire others to help
Agree to the hours required to complete a specific job or project
Are engaged for a defined task or time period
Bear the risk of making a profit or loss and hold their own insurance
Provide and maintain their own tools and equipment
Pay their own tax and GST
Operate under an ABN and issue invoices
Do not receive paid leave entitlements

👉 In short: A contractor runs their own business and provides services to yours.

⚖️ Why Getting It Right Matters

Misclassifying a worker can lead to costly back payments for unpaid super, leave entitlements, and payroll tax — not to mention potential Fair Work or ATO penalties.

Even if a person has an ABN or issues invoices, that alone does not make them a contractor. And a contractor can perform the same kind of work as an employee — the key difference lies in how the relationship is structured and managed.