Online businesses often grow with help from outside the owner’s own four walls. A web developer, a copywriter, a virtual assistant or a packer might all do regular work for you. The big question is whether each person is an employee or an independent contractor. The answer affects pay, super, tax and your legal risk.
Calling someone a contractor does not make them one. Australian workplace law looks at how the arrangement really works. This guide explains the main tests and the rules on sham contracting, based on Fair Work Ombudsman and ATO guidance.
Why the label matters
Employees and contractors have very different rights. The Fair Work Ombudsman says contractors do not receive employee entitlements such as annual leave, sick leave or minimum pay rates. They generally handle their own income tax and GST, if applicable. Employees have those entitlements protected by law.
For an online business, the line can blur quickly. A freelancer who once built your store might now work set hours each week updating products. Someone helping with digital marketing tactics may be taking daily directions from you. Over time, the reality of the work can change even if the paperwork stays the same.
The whole of relationship test
For constitutionally covered businesses, the Fair Work Ombudsman says the whole of relationship test has applied since 26 August 2024. Businesses with Pty Ltd or Ltd in their name are usually constitutional corporations. The test is set out in sections 15AA to 15AD of the Fair Work Act 2009. It looks at the real substance, practical reality and true nature of the relationship.
This means the written contract is only part of the picture. Decision makers also look at how the work is actually done day to day. For work done before 26 August 2024, a different test applies. Some state referred businesses and workers who have opted out also use a different test.
Indicators that are weighed up
The Fair Work Ombudsman guide to the whole of relationship test lists several indicators. No single one decides the outcome. They are considered together.
- Control: who decides the hours, the place of work and how the work is done
- Financial risk: whether the worker carries the risk of profit or loss on each job and is liable for poor work
- Tools and equipment: whether the business supplies them or the worker uses their own
- Delegation: whether the worker can subcontract the work or send someone else
- Hours of work: whether hours are set by the business or agreed per task
- Continuity: whether there is an ongoing expectation of work or a single task
Think of a developer who quotes a fixed price to build a new feature, uses their own equipment and works for several clients. That picture leans to contractor. Compare a person who logs in at set times, follows your instructions and only works for you. That picture leans to employee, whatever the contract says.
An ABN does not settle it
Many business owners believe that a worker with an ABN must be a contractor. The Fair Work Ombudsman is clear that this is not the case. Having an ABN or sending invoices does not automatically make someone a contractor. The type of work they do does not decide it either.
If the position is genuinely unclear, a court may need to decide. The Fair Work Ombudsman suggests getting legal advice in that situation. It is far cheaper to get advice at the start than to unwind an arrangement later. Keep a written record of how you set up each role and why.
Sham contracting is against the law
The Fair Work Ombudsman says sham contracting is illegal under the Fair Work Act 2009. It happens when a business presents an employment relationship as an independent contracting arrangement. The aim is often to avoid obligations such as super, leave and workers compensation. Doing this knowingly or recklessly is unlawful.
The Act also covers two related practices. A business must not make false statements to persuade an employee to become a contractor for the same work. It must not dismiss, or threaten to dismiss, an employee in order to take them back as a contractor for the same or mostly the same work. Penalties can apply for each contravention.
In March 2026 the Fair Work Ombudsman and the ATO announced an increased focus on sham contracting. The joint media release on sham contracting says the ATO matches contractor payment reports against tax returns, ABN records and super reporting. It looks for signs such as contractors working almost entirely for one business. The release lists maximum penalties of up to $99,000 per contravention for businesses with fewer than 15 employees.
Super, tax and other obligations
Super is an area where small online businesses can get caught out. According to the Fair Work Ombudsman, contractors usually pay their own super. However, if a contractor is engaged wholly or principally for their labour, the business may still be responsible for paying it. The joint 2026 release makes the same point.
Getting the classification wrong can also lead to tax problems. The release mentions penalties for failing to withhold tax and the super guarantee charge, which includes the shortfall, interest and an administration fee. An accountant or registered tax agent can check how each of your workers should be treated.
Practical steps for online business owners
Start by writing down how each person works for you in practice. Note who sets the hours, who supplies the equipment and whether they work for other clients. Compare that with the indicators above. If a role looks more like employment, treat it that way.
Put agreements in writing and keep them up to date. Many businesses now sign contracts online, and electronic signatures can make that simpler. Check how your workers handle customer data too, and make sure your privacy policy reflects who can access it. Review each arrangement once a year, or whenever the role changes.
Workplace obligations stay with you as a business owner. Employees bring other duties, such as workplace health and safety policies and steps to take if an employee tests positive for drugs. Contractors also have protections, including against adverse action and coercion. Under the Independent Contractors Act 2006, a court can review a contract that is harsh or unfair to a contractor.
Frequently asked questions
Can I treat someone as a contractor just because they have an ABN?
No. The Fair Work Ombudsman says an ABN or invoices do not automatically make someone a contractor. The whole relationship is considered, including how the work is done in practice.
Do I have to pay super for contractors?
Contractors usually pay their own super. If a contractor is engaged wholly or principally for their labour, you may be responsible for it. Check with the ATO or a tax agent.
Does the written contract decide the outcome?
Not on its own. The contract terms are considered, but so is how the work is actually carried out. A worker called a contractor in a contract may still be an employee.
Are the rules the same in every state?
Not always. The whole of relationship test applies to constitutionally covered businesses. State referred national system businesses use the start of relationship test instead. Other obligations can differ between states and territories, so check the rules where you operate.
This article is general information only about Australian law and is not legal advice. Laws and processes differ between states and territories and change over time. Speak with a qualified lawyer about your own circumstances.
