Employee vs Contractor in Construction
Employee or contractor in construction Australia: how builders decide, sham contracting risks, ATO and Fair Work checks, and when labour hire fits better.
A new chippie starts Monday. They send an ABN, quote a day rate and call themselves a subbie. By Wednesday you are setting their hours, directing every task and lending them your gear. Labels and invoices do not settle this. Here is how employee vs contractor works for builders in Australia, and how to avoid getting it wrong.
General information only, not legal or tax advice. Fair Work and the ATO look at different rules. Get advice for your own contracts.
The short answer: employee, contractor or labour hire?
Look at how the work will really run, not just the label or an ABN. Factors such as control, tools and who can do the work are clues only. They are not a checklist that fixes legal status. Fair Work and the ATO use different tests. Check both, then get advice for your facts.
Wrong status costs more than wages. Work out what hiring really costs you, or read the cost of a bad hire in construction.
Why this choice matters on a building site
The actual arrangement (and the status that follows from it) decides what you owe. The word on the invoice does not.
- Pay and leave. Permanent and part-time employees usually get award or agreement pay and paid leave where those rules apply. Casual employees are paid differently and usually do not get the same paid leave. Contractors usually invoice for a job and do not get employee leave.
- Tax and super. For employees you usually withhold tax and pay super. Contractors often handle their own tax. You may still owe super if the deal is mainly for their labour. The ATO sets those rules.
- Hours and direction. Employees work under your direction. Genuine contractors decide how to deliver a result.
- Tools and risk. Who brings the gear, and who pays if the work is defective?
- Who can replace them. Can they send someone else, or must they do the work themselves?
Labour hire is a third path. You pay a labour hire firm. That firm engages the worker. Host businesses still have site and safety duties. See labour hire vs direct hire for builders.
How Fair Work decides employee or contractor
For Fair Work Act purposes, section 15AA of the Fair Work Act 2009 (compilation current as at 7 July 2026) sets the test. It asks for the real substance, practical reality and true nature of the relationship. You must look at the whole relationship. That means the contract terms and how the work is done in practice.
Section 15AA came in with the Closing Loopholes No. 2 changes. Fair Work's independent contractor changes page says it started on 26 August 2024. It also says which businesses the new approach covers. It does not change tax, super or workers compensation rules. Some high-income people can opt out under sections 15AB to 15AD if the Act's earnings rules are met. Section 15AA does not apply to every part of the Act (see subsection 15AA(3)).
Fair Work also has a contracts in building and construction page. Use it as industry guidance. It does not replace the Act or advice for your facts.
Practical questions builders often ask. These are planning prompts. They are not a legal checklist that settles status:
| Topic | Often points toward contractor | Often points toward employee |
|---|---|---|
| How engaged | Agreement for a service, often with an ABN | Employment contract for their labour |
| Pay | Invoices for a job or result | Hourly or weekly rate, with employee entitlements where they apply |
| Control | Decides how to do the work | Works under your direction |
| Risk | Carries risk for quality and completion | You carry that risk |
| Tools | Uses their own tools | Uses your tools, or gets a tool allowance |
| Other workers | Can engage someone else to do the work | Generally must do the work themselves |
No single row settles the answer. An ABN and a contractor agreement are not enough on their own. Fair Work and the ATO each apply their own tests for their own purposes.
What the ATO looks at (and why it is different)
The ATO decides employee or contractor for tax and super. That is not the same as Fair Work leave and pay rules.
After High Court cases in 2022, the ATO's difference page says you look at the rights and duties in the contract. A label such as "contractor" does not decide it. Day-to-day habits matter only if they change those contract rights.
The ATO still lists useful signs from those rights: control, whether they serve in your business, how they are paid, whether they can subcontract, who provides tools, who bears risk, and who gets the goodwill.
The ATO also says apprentices, trainees, labourers and trades assistants are always employees for tax and super. If you hire a company, trust or partnership, that entity is the contractor for tax and super. Even some genuine contractors may need super if the deal is mostly for their labour.
Start from the ATO employee or independent contractor hub. Use any employee or contractor tools the ATO publishes there, and keep a copy of the result. Get advice if the answer is close.
Sham contracting: what it is and why builders get caught
Under Division 6 of Part 3-1 of the Fair Work Act:
- Section 357 stops an employer saying an employment contract is a contract for services (independent contracting). There is a defence if the employer reasonably believed it was a contract for services when they said so. The Act says you must look at the size and nature of the business when judging that belief. You may also look at other relevant matters.
- Section 358 stops dismissing or threatening to dismiss an employee so you can take them back as a contractor for the same, or much the same, work.
- Section 359 stops making a statement you know is false to push someone into a contractor deal for the same, or much the same, work.
An invoice label is not enough. Fair Work and the ATO both watch building and construction for this. See Fair Work's sham contracting page for plain guidance.
Want hiring checklists that sit beside this decision? Get the free 7 Hiring Mistakes report. It comes with the Recruiter's Toolkit.
Penalties and costs if you get it wrong
Sections 357 to 359 are civil remedy provisions. Courts can order Fair Work Act penalties for sham contracting. Top amounts change over time. Check the live Fair Work sham contracting page, or a current adviser, for figures that apply to you.
Getting the tax status wrong is separate. The ATO's incorrectly treated workers page lists risks such as PAYG tax penalties and the super guarantee charge. That charge can include shortfall, interest, a fee and further Part 7 penalties of up to 200% of the charge. Get advice before you rely on a contractor label for day labour.
A simple decision checklist before you engage someone
Run through this before you agree terms. It is a planning checklist, not a legal test. Factors are not a score sheet that fixes status. Fair Work and the ATO use different tests for different purposes. No single factor settles it.
- What result or role are you buying: a finished trade package, or day labour under your foreman?
- Who sets hours, methods and daily tasks?
- Who supplies most tools and plant?
- Who pays if the work is defective?
- Can they send a qualified replacement under the contract?
- Do they work for other clients, with their own business systems?
- Have you read Fair Work's building page, the Act's section 15AA idea, and the ATO difference page for your facts?
- Have you saved any ATO tool result, and got advice if it is close?
Our guide on how to hire tradies without a recruitment agency covers the hiring steps once the engagement type is clear.
Example only: two people both called "subbies"
This table is example only. It is not a real case and not legal advice.
| Sign | Person A | Person B |
|---|---|---|
| Control | You set 6:30 starts and daily tasks | They price the job and plan the work |
| Tools | Mostly your tools | Their own tools and vehicle |
| Pay | Day rate, weekly | Fixed price for a stage, invoice on completion |
| Replacement | Must do the work themselves | Contract lets them send a qualified person |
| Other clients | Works only for you | Works for several builders |
On these invented facts, Person A looks more like an employee. Person B looks more like a contractor. Your real paperwork and day-to-day setup decide the answer. Do not treat any one column as proof.
When labour hire or a genuine subbie business can fit better
A genuine contractor often runs their own business. They decide how to do the work. They invoice for a result. They bring their own tools. They carry risk on their work. They can send someone else. Those signs can help you plan. They do not, by themselves, lock in legal status.
If you need someone under your direction every day, many builders prefer employee or labour hire as a clearer commercial fit. That is a preference. It is not a compliance guarantee. Labour hire can help for short peaks. Read the labour hire terms. The firm usually engages the worker. You still carry host duties on your site, including safety.
What to put in place either way
Whatever path you choose:
- Put the agreement in writing.
- Do site induction and ticket checks that match the work.
- Call a past supervisor. Our reference check questions for tradies help.
- Plan the first fortnight so they know what good looks like. See how to keep good tradies.
To see how ready your hiring process is overall, take the free Hiring Readiness Scorecard.
General information only, not legal or tax advice. Check the Fair Work Act, Fair Work Ombudsman guidance, the ATO and a qualified adviser for your own situation.
Want help with your next hire?
Book a free 15-minute discovery call and we will talk through your next hire. Prefer to learn it yourself? The Construction Hiring System course ($497 AUD) teaches the full method, from the brief to the first fortnight on site.
FAQ
Should I hire a tradie as an employee or a contractor in Australia?
Look at how the work will really run, not just the label or an ABN. Factors such as control, tools and who can do the work are clues only. They are not a checklist that fixes legal status. Fair Work and the ATO use different tests. Check both, then get advice for your facts.
What is sham contracting?
Under the Fair Work Act, sham contracting includes saying employment is contracting when it is not (section 357). It also covers dismissing someone to take them back as a contractor for the same work (section 358), or making a false statement to push that change (section 359). Section 357 has a reasonable-belief defence. Not legal advice.
Does having an ABN make someone a contractor?
No. An ABN on its own does not decide the relationship. Fair Work looks at the real substance of the whole relationship for its purposes. The ATO looks at contract rights and duties for tax and super. Treat every ABN-only arrangement with care and check the official guides before you engage them.
What are the penalties for sham contracting?
Sections 357 to 359 are civil remedy provisions. Courts can order Fair Work Act penalties. Maximum amounts change, so check current Fair Work guidance or an adviser. Getting tax status wrong can also trigger PAYG and super problems with the ATO. Get advice if you are unsure.
When is a contractor the right choice on a building job?
A contractor can fit when they run their own business, decide how to do the work, invoice for a result, bring their own tools, carry risk, and can send someone else. Those signs help you plan. They do not settle legal status alone. If you control the day, review employee or labour hire options.