Employee vs Contractors: Super for Contractors

Understanding and determining the difference between an employee and an independent contractor is critical for all Australian businesses especially in the construction industry which relies so heavily on contractors to operate. 

The reason why it is important to determine the difference between an employee and an independent contractor is that in some circumstances a contractor may be deemed an employee for superannuation guarantee purposes which means, you, the business will need to pay super for them. This is now more significant than ever with payday super commencing on 1st of July 2026.

The best place to start in determining if you have a super obligation is understanding the difference between an employee and an independent contractor.

What is an employee?

Put simply the ATO describes an employee as someone who works in and is part of your business. Key features of an employee include:

• The employee is controlled by the employer on how, when and where the work is done
• The employee is paid a wage or salary by the employer
• The employee is provided the tools necessary by the employer to do their job
• The employee is entitled to leave (Annual, personal etc.)
• Is integrated into the business (i.e. attends staff meetings and has a uniform)

Employees work in the business.

What is an independent contractor?

An independent contractor runs their own business and provides services to clients (Usually multiple businesses). They work with a business rather than in the business. Key features for an independent contractor include:

• They have their own ABN and business structure
• They control how, where and what work they do
• They issue invoices for work completed
• They provide their own tools and equipment
• They can work for multiple business.

Contractors work for the business not in it.

Why does the difference matter?

In many circumstances in the construction industry contactors meet the legal definition of employees for Superannuation Guarantee purposes. An employee for superannuation guarantee purposes is defined broadly as a person who works under a contract of service (a common law employee) or a person working under a contract wholly or principally for their labour. Getting the classification wrong can cause serious issues which can include penalties and back payment for unpaid superannuation. Simply calling someone a contractor and thinking I don’t need to pay them super is not correct. What determines the outcome is the actual working relationship.

When do you need to pay superannuation for contractors

As a business you must pay superannuation guarantee for a contractor if all the following apply:

1. The contract with the contractor is mainly for their personal labour that being more than 50% of the value is labour
2. The contractor does not have the ability to delegate the work and they perform the work personally.
3. The contractor is paid for the time worked such as per hour rather than on completion of the job. 

Example: Luke is a sole trader painter who works 20 hours a week for Marks Company Dardanup Homes. Luke is paid by the hour and does all the work himself. 

Mark in this instance would have to paid Luke super on top of his hourly rate as he falls into the definition of an employee for superannuation guarantee purposes. 

When Super is not required for contractors 

1. Super is not required when a contractor is engaged to produce a specific result such as “supply and install the roof for $15,000”. Result based payments (fixed quote jobs) are outside superannuation guarantee because the payment is for the outcome not the labour hours.
2. Contracting through a company or a trust.
   If you operate either though a Company (Dardanup Homes Pty Ltd) or a Trust (The Bunbury Roofing Family Trust) then the superannuation guarantee does not apply.
3. Contractors who supply significant tools or machinery such as an excavator to produce the outcome of their contractor may fall out the superannuation guarantee as less than 50% of the value is for labour. 

Example: Shannen is a Carpenter who operates through a company structure. She frequently does contract work for Dardanup Homes Pty Ltd and is paid once the task she was contracted for is complete. 

In this instance no superannuation guarantee would apply as she meets the definition of an independent contractor and not an employee for superannuation guarantee purposes. 

Summary

Understanding the difference between an employee and an independent contractor is essential for Australian businesses and their superannuation guarantee (SG) compliance. In many circumstances contractors can legally be treated as employees, requiring super payments.

Employees generally work in the business whilst independent contractors work for the business. For superannuation guarantee purposes, a contractor may still be considered an employee if the contract is mainly for their personal labour and they are paid for time worked rather than a result. 

Correctly classifying whether a contractor is independent or an employee for superannuation guarantee purposes is essential to avoid penalties and stay compliant. If in doubt you should always consult with your local tax professional.
 

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.