Subcontractor or Employee: Getting the Classification Right

Dan runs Coastline Carpentry, a 14-chippy outfit working between Caloundra and Maroochydore. Last winter he picked up a big townhouse fit-out and pulled in three extra blokes "on their ABN" to handle the kitchens. They turned up at his site every day, used his utes, his nail guns, his job sheets, and Dan told them when to start and when to knock off. Nine months later one of them did his back in, and the whole arrangement unravelled. WorkCover came asking. The ATO came asking. Fair Work came asking. By the time Dan's accountant had finished the clean-up, he was staring down close to $80,000 in back-paid super, PAYG, leave entitlements and penalties — and that was before the sham contracting investigation got moving.

Dan didn't set out to rip anyone off. He just did what plenty of Queensland builders, sparkies and plumbers do: assumed an ABN and an invoice meant "contractor". The truth is messier, and as of 2024 the rules around classification have shifted again. If you hire on the tools in QLD, getting this right has never mattered more.

Why the contractor-versus-employee question keeps tripping up tradies

The temptation is obvious. Bringing someone on as a subbie feels simpler — no payroll tax, no super, no annual leave, no termination headaches. You agree a rate, they invoice, you pay. For genuinely independent operators that arrangement is perfectly legitimate. The problem is that the law doesn't care what you call the relationship. It cares about what the relationship actually looks like in practice.

Two separate frameworks decide that question, and both can bite you. The Australian Taxation Office runs its own multi-factor test to work out whether you owe PAYG withholding, super guarantee and (in some cases) payroll tax. The Fair Work Act runs a different (though overlapping) test to decide whether the person is entitled to the National Employment Standards, award rates, leave and unfair-dismissal protection. You can be a contractor for one and an employee for the other. You can also be neither and find yourself dragged into "sham contracting" territory, which carries the steepest penalties of all.

The 2022 High Court decisions in Personnel Contracting and Jamsek shifted the goalposts toward what's written in the contract — but then the Closing Loopholes legislation in 2024 partly wound that back, reintroducing a "whole of relationship" test from August 2024. In plain English: a tidy contract on its own won't save you anymore. Conduct on site is back in play.

The ATO multi-factor test, in tradie terms

The ATO's approach is best understood by thinking about how a genuinely independent subbie actually operates. Consider Mick the tiler. Mick runs his own ute, carries his own public liability, quotes per square metre, brings his own trowels and wet saw, and tiles for six different builders in any given month. If a job runs over because he stuffed up the levels, that's his problem and his cost. He decides when he starts and finishes, as long as the bathroom is ready when the plumber's due. Mick is a contractor.

Now consider Jayden, who Dan brought onto the townhouse job. Jayden turned up at 6:30am because Dan told him to. He worked on whatever Dan pointed at. He used Dan's tools, Dan's vehicle, Dan's materials. He was paid by the hour. He couldn't send his mate to do the work instead — Dan wanted Jayden specifically. He worked five days a week on that one job for nine months. Jayden has an ABN, sure. But by every meaningful measure he's an employee.

The ATO weighs up factors like control (who decides how, when and where the work gets done), integration (is the worker part of your business or running their own), delegation (can they sub the work to someone else), risk (do they wear the cost of mistakes), tools and equipment (whose gear), method of payment (hourly versus per-job-quoted) and basis of engagement (one-off versus ongoing). The official ATO position and the decision tool are set out at ato.gov.au, and they're worth running through every single time you engage someone new.

A critical point that catches a lot of builders out: even where someone genuinely is a contractor for income tax purposes, you may still owe super guarantee if you're paying them principally for their labour. That one alone has cost more QLD businesses than any other classification mistake.

The Fair Work test and what changed in August 2024

From 26 August 2024, Fair Work shifted to assessing the "real substance, practical reality and true nature" of the relationship. The contract still matters, but it's no longer the be-all-and-end-all. Inspectors and the Commission will look at how the work actually played out — site induction records, who issued instructions, rosters, invoicing patterns, whether the worker advertised their services elsewhere.

The Fair Work Ombudsman publishes a clear breakdown of the indicators and the new "whole of relationship" approach at fairwork.gov.au. If you're hiring in Queensland and you haven't reviewed your subbie arrangements since the changes, that's your weekend reading.

There's also a new "opt-out" pathway for higher-earning contractors (above the contractor high-income threshold) who want to stay as contractors. But for the average chippy, second-year sparky or labourer on $35–$50 an hour, the protections apply automatically and you can't contract out of them.

Common QLD mis-classification traps

The patterns repeat across every trade in the state. Here are the ones we see catch employers out most often.

The "permanent subbie"

Someone who has worked exclusively for your business for six, twelve, eighteen months. They've got an ABN, you pay them weekly against an invoice, but they don't work for anyone else and they never have. The longer the arrangement runs, the harder it becomes to argue they're independent. Duration alone doesn't determine it — but combined with exclusivity and integration, it's usually fatal.

The "labour-only" subbie on a domestic job

Plumber engages another plumber's apprentice on weekends for cash-plus-invoice "on his ABN". The apprentice is being directed, supervised and paid hourly, using the principal plumber's gear. That's not subcontracting — that's an unlawful side employment relationship, and it can also drag the apprentice's host employer into a training contract breach.

Day-rate confusion

Day-rate engagements are common in civil, mining and shutdown work. Paying someone $750 a day doesn't automatically make them a contractor — plenty of day-rate workers are employees, and plenty are legitimate contractors. The classification turns on the same factors as any other arrangement. If you're scoping out day-rate or labour-hire arrangements, look at how the industry structures them properly on the day-rate and labour-hire jobs board before you draft your contract.

The "everyone on this site is a subbie" model

Some small builders run their whole crew this way. It can work — but only if every single worker genuinely operates an independent business with multiple clients, real commercial risk, and the ability to refuse work. If they all turn up to your toolbox talk each Monday and follow your program, you've effectively got a workforce, not a panel of contractors.

Phoenix-style ABN onboarding

Forcing a prospective employee to get an ABN before you'll engage them is a textbook indicator of sham contracting. So is telling someone "we only hire on ABNs". The Fair Work Ombudsman actively investigates this pattern in construction.

Sham contracting: the part that ends careers

Sham contracting is where you misrepresent an employment relationship as a contracting arrangement, or pressure an employee to become a contractor. Civil penalties for sham contracting were lifted significantly under the Closing Loopholes reforms. For a body corporate they now sit at up to $99,000 per contravention for standard breaches and substantially more for serious contraventions. Add the back-paid super (with interest and the super guarantee charge, which is not tax-deductible), unpaid PAYG, unpaid leave, payroll tax exposure and possible WorkCover premium adjustments, and a single misclassified worker can cost a small QLD builder six figures.

The defence used to be that you honestly believed the person was a contractor and weren't reckless about it. That defence still exists, but the bar has been raised — you now need to show the belief was reasonable, taking into account the size and resources of your business. A two-person operation might be cut some slack. A 30-staff mechanical contractor with a bookkeeper and an accountant probably won't be.

Why the ABR ABN check actually matters

Quick test before paying any new subbie's invoice: jump on the Australian Business Register and check the ABN. Is it active? Is it registered to the entity on the invoice? Is it GST-registered if they've charged GST? A surprising number of "contractors" turn out to be using a cancelled ABN, a personal ABN that doesn't match the trading name on the invoice, or no ABN at all (in which case you should be withholding 47% PAYG from the payment).

The ABN check is also a useful tell for classification itself. Someone whose ABN was registered last Tuesday, has no GST registration, no business name, no website and no other clients is almost certainly an employee dressed up as a contractor.

Getting it right at the hiring stage

The cleanest fix is upstream — decide what you actually need before you advertise. If the role is ongoing, directed, integrated and hourly, advertise it as employment. The pool of trades available for proper PAYG roles in QLD is deeper than most employers think, and you'll save yourself a world of compliance pain. When you're ready, post a job on ATQ and structure it as the role it actually is.

If you genuinely need a contractor — a specialist sparky to commission switchboards, a crane crew for a single lift, a roofer to do flashings — write a proper contract for services scoped to a deliverable, not an hourly rate against your timesheet. Get a copy of their public liability, their licence, their workers' comp if they have employees, and check the ABN.

For larger employers juggling permanent crews, casual fill-ins and specialist contractors, it's worth looking at how your hiring stack is set up overall. The pricing and features for employers page walks through how to structure ongoing recruitment so you're not making rushed classification calls under deadline pressure — which is when most of the bad decisions get made.

A practical workflow for QLD employers

Before you engage anyone new, run the three-minute check. Will I be controlling how they do the work day-to-day? Are they bringing their own tools, vehicle and insurances? Will they be free to take other work while engaged with me? Can they send a substitute? Are they quoting a price for a defined job, or charging me hourly? Have they got real commercial risk if it goes wrong?

If most answers point to "they're integrated into my business", treat them as an employee from day one. Sort the award rate, super, leave accrual and WorkCover, and move on. The peace of mind is worth more than the few dollars you save on the alternative.

Dan from Coastline Carpentry has restructured the whole shop since his bad year. The three blokes who were "subbies" are now PAYG carpenters on the award, plus an over-award site allowance. His insurance premiums went up modestly. His tax bill is no different in real terms once super and leave loading are factored against the rates he was paying before. And his evenings are no longer spent waiting on letters from the regulator. Worth every cent.