You know that moment when someone asks “Are they on wages or a subbie?” and you just… shrug?

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It feels like tomato vs tomato, right? They do the work, you pay them, end of story.

Except the ATO doesn’t see it that way.

They’ve got a whole playbook of rules for working out whether someone is an employee or a subcontractor.

And if you get it wrong, the fallout can cost you a lot more than just a few awkward payslips.

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Why the ATO Is So Fired Up About This

This isn’t just a boring line in the tax rulebook, it’s one of the ATO’s hottest hot buttons right now.

Why?

Because the difference between calling someone an employee or a subbie changes everything from super, tax, leave entitlements, to workcover premiums.

When businesses get it wrong, two things happen:

1. The worker misses out on things they were legally entitled to (like super).
2. The ATO misses out on tax revenue.

That second one in particular keeps them awake at night.

So, they’ve put serious resources into cracking down on sham contracting (where someone’s called a contractor when they’re really an employee).

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Employee vs Subbie: The Key Differences

Here’s the simplest way to think about it:

• Employees
  
  • Work in your business, under your direction.
  • Paid wages, accrue leave
  • You cover their super, PAYG tax, workcover, and entitlements.

• Subcontractors
  
  • Run their own business and provide services to yours.
  • Issue invoices, set their own hours (mostly), use their own tools/equipment.
  • Cover their own tax, super, insurance and leave (no paid holidays here).

Sounds black and white, but the ATO loves the colour grey...

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How the ATO Decides

Forget what you call them (subbie, consultant, mate helping out for cash). The ATO looks at the reality.

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Their tests include...

🔎 Control – Do you tell them how, where and when to do the work? More control = employee.

🔎 Independence – Can they delegate work to others, or is it tied to them personally? Less independence = employee.

🔎 Tools & Equipment – Do they bring their own gear, or do you supply everything? No gear = employee.

🔎 Risk – Who wears the risk if something goes wrong , you or them? If you wear the risk = employee.

🔎 Payment Basis – Are they paid for time (hourly rate) or for results (quote/job price)? Hourly = employee.

🔎 Integration – Are they part of your business, or just an external provider? Part of your business = employee.

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These tests have to be looked at together... ticking one box doesn’t mean you get to saddle up and ride off into the sunset.

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In short: if they look, act and smell like an employee, the ATO will probably say they are one.

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The Superannuation Trap

Here’s where a lot of business owners get caught out. Even if someone passes the tests to be considered a contractor, you may still have to pay them super.

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That’s because the rules for super are slightly different to the rules for deciding if someone’s an employee.

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‍A worker may be entitled to super if:

• They’re paid mainly for their labour (not for supplying goods or equipment).
• They perform the work personally (can’t subcontract it out).
• They’re paid by the hour or by the day, rather than a fixed result.

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So yes, even if they invoice you with an ABN and call themselves a contractor, if the arrangement is essentially you pay me for my time and effort, then you might still be legally required to pay them super.

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👉 Key point #1: Passing the contractor test doesn’t automatically get you off the hook for super.

👉 Key point #2: Partnerships, trusts and companies can’t be employees for super purposes.

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What Happens If You Get It Wrong

Let’s say you’ve been paying someone as a subbie, but the ATO decides they’re actually an employee.

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What now?

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💸 Back-pay entitlements – Annual leave, sick leave, public holiday pay… the lot.
💸 Superannuation – You may need to pay super on all past payments (plus interest and penalties).
💸 PAYG Withholding – You could be on the hook for unpaid tax that should’ve been withheld.
💸 Workcover – If they get injured, the claim could come back to you.
💸 Fines & penalties – The ATO and Fair Work aren’t shy about slapping penalties on “sham contracting.”

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Basically, you’ll be asked to play catch-up on everything you avoided by calling them a subcontractor.

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Super, Leave & WorkCover: Who Covers What?

• ‍Superannuation – Employees must be paid super. Some contractors also fall under super rules (if they’re paid mainly for their labour, even via ABN).‍
• Leave entitlements – Employees accrue annual leave and personal leave. Contractors don’t.‍
• Workcover – Employees are covered under your policy. Contractors need their own insurance (unless the workcover authority decides they “count” as employees).

The Wrap-Up

The difference between a subcontractor and an employee isn’t about what you call them... it’s about how the relationship works in practice.

👉 If you’re unsure, don’t roll the dice. A quick chat now can save you a world of hurt (and a fat bill from the ATO) later. At PAL, we help business owners get this right so you can hire with confidence and focus on growing your business.

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– The team at PAL (making accounting slightly less boring since way back when)

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Disclaimer: This article is here to give you general info only, not professional advice specific to your unique situation. While efforts are made to ensure accuracy, the content may change over time. We can’t take responsibility for any decisions based on the contents of this article, so be sure to chat with your accountant or advisor first!

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