Contractor

Whether you’re scaling up your small business or handling your first major project, you’ll need to have a firm understanding of how contractors work.

A contractor is a useful way to get specialist service without hiring an employee in the traditional way. Just remember that this flexibility also comes with a few compliance hurdles. From tax and superannuation purposes to legal obligations and employment classifications, the line between a contractor and an employee isn’t always clear.

Contractor definition

A contractor, or independent contractor, is an individual or business that sells its goods or services to another company under a contract or agreement. Unlike an employee, a contractor runs their own business. That means they negotiate their own pay and often work on a project or a fixed-term basis.

Contractors can operate solo or engage their own subcontractors to complete all or part of the services required under the contract. In many cases, contractors specialise in a certain trade or profession – think IT, construction, accounting, marketing, creative services – and work with multiple clients rather than committing to one employer.

They are commonly referred to as freelancers, consultants, sole traders, or subcontractors, depending on the industry and context. But the common thread is this: contractors are not employees, and therefore they are not afforded standard employee entitlements like sick leave, annual leave, and superannuation contributions – unless otherwise specified.

How contractors work

Contractors work for themselves and are responsible for managing the business side of their operations. That includes sending invoices, tracking income, setting aside money for income tax, buying tools, and holding the right type of insurance.

Most contractors operate with an Australian Business Number (ABN) and might register for GST if their turnover exceeds the threshold (over $75,000 per annum). They will usually sign a contract that outlines the terms of engagement, including the services to be delivered, timeframes, payment terms and ownership of intellectual property.

Importantly, contractors can choose their own hours and ways of working (e.g. remotely), provided they meet the deliverables in their agreement. This gives them a degree of independence, but it also places the onus on them to manage their own financial obligations and work pipeline.

Contractor vs employee: What’s the difference?

The ATO and Fair Work Ombudsman have lots of helpful advice to help you figure out whether someone is genuinely a contractor or should be treated as an employee.
Some of the major differences between contractors and employees include:

If you run a business and hire contractors, you’ll need to look at each engagement individually. Misclassifying an employee as a contractor can cause serious legal issues and financial penalties.

Hiring a contractor: Benefits for businesses

Hiring a contractor instead of an employee can be a smart way for your business to scale up temporarily or bring in specialist skills without all the extra legwork. Here are some benefits:

• Flexibility: You can hire contractors on a short-term or per-project basis.
• Cheaper: No need to pay employee entitlements like annual leave, sick leave or redundancy.
• Less admin: Contractors manage their own income tax, insurance and superannuation (unless required otherwise).
• Specialist skills: Contractors can bring a level of expertise and experience from working across multiple industries.
• No ongoing commitment: Once the agreed-upon task is done, the engagement ends – unless renewed.

That said, contractors might charge a higher hourly or project rate than employees. And unlike staff members, they aren’t obligated to be exclusive to your business.

Contractor responsibilities and obligations

Contractors take on greater personal and financial responsibility than regular employees. They are responsible for:

• Registering for an ABN and lodging income tax returns
• Setting aside tax and GST payments
• Arranging their own insurance (e.g. professional indemnity and public liability)
• Handling their workload, deadlines, business development, etc.
• Meeting deliverables outlined in the contract
• Engaging any subcontractors or extra help needed
• Keeping up to standards

Some contractors also invest in their own professional development, new or better tools and marketing to stay competitive in their industry.

Contractor pay and invoicing

Unlike employees who receive wages via payroll, contractors will negotiate their pay with the hiring company, then issue invoices for the work completed (either before or after). Invoices need to include the contractor’s name and ABN, a description of the services provided, the total amount payable (including GST if applicable), and the payment terms (e.g. 14 or 30 days).

Depending on the project and industry, contractor rates can be calculated as an hourly, daily or per-project figure. Be aware that lots of contractors factor in time spent on admin, insurance, taxes and overheads when calculating their rates.

Legal obligations for businesses using contractors

Before hiring a contractor, you’ll need to be fully across your legal obligations, especially if your business works with both contractors and other employees. So make sure you:

• Confirm the nature of the engagement: Is this person truly a contractor, or are they acting as an employee in disguise? Read up on the ATO’s employee/contractor decision pages if unsure.
• Draw up a written contract: This should explicitly define roles, deliverables, pay terms, termination conditions, and IP ownership.
• Insurance requirements: Confirm whether or not the contractor has the appropriate insurance for their work.
• Review your responsibilities for superannuation purposes: In some cases, contractors must be paid super (e.g. if they work under a contract mainly for their labour).
• Comply with anti-discrimination and WHS laws: Contractors are still covered by Australian employment law, including workplace safety and equal opportunity rights.

When in doubt, speak to a professional like a lawyer, accountant or HR consultant.

Common types of contractors

You’ll find contractors working in basically every industry, although they are in high demand across the following sectors:

• Trades and construction: Electricians, plumbers, carpenters, labourers.
• Professional services: Accountants, lawyers, IT consultants, engineers.
• Creative industries: Writers, designers, photographers, videographers.
• Marketing and communications: SEO specialists, PR consultants, copywriters.
• Health and wellness: Physiotherapists, personal trainers, allied health professionals.

Some contractors also operate under a company structure or trust, which might change the nature of their contracting arrangements and tax responsibilities.

What to include in a contractor agreement

You must have a well-drafted contract when engaging with an independent contractor. At a minimum, it should cover:

• The services being provided.
• Duration and true nature of the engagement.
• Project milestones and timelines.
• Payment terms, rates, and invoicing procedures.
• Ownership of IP.
• Confidentiality and privacy clauses.
• The dispute-resolution process.
• Termination conditions.
• Insurance and liability expectations.

Unless you’re a lawyer yourself, it’s highly recommended that you get a legal professional to review your agreements, especially if you plan to use the same template with multiple contractors.

Getting professional advice

It’s vital when hiring contractors that you get professional advice to ensure it’s all above board. There’s a fine line between flexibility and breaches of Australian employment law, especially if neither you nor the contractor fully understands your role and responsibilities.

So, before locking in a contractor for a job, think about:

• Speaking with a workplace lawyer or HR expert.
• Using the ATO’s employee vs contractor information.
• Reviewing Fair Work’s guidelines on independent contractors.
• Speaking to an accountant to clarify the financial implications.

Getting the right advice upfront means you’ll reduce the chances of expensive mistakes while also protecting both your business and the worker involved. This keeps you compliant with the ATO and helps build respectful, productive relationships with your contractors.