When a Contractor Becomes an Employee

Lessons from a Recent Fair Work Decision

Calling someone a contractor doesn’t make them one. That message keeps coming through in Fair Work Commission decisions, as the Commission looks past the paperwork to how working relationships actually operate.

A recent decision is a timely reminder that labels alone do not decide whether a worker is genuinely an independent contractor. For businesses that engage people on an ABN, it’s a good time to check that the reality matches the contract.

What the law says: section 15AA

Since 26 August 2024, section 15AA of the Fair Work Act 2009 has set out how to decide whether someone is an employee or an independent contractor.

Under section 15AA, the question is answered by looking at the real substance, practical reality and true nature of the relationship. The Commission must consider the totality of the relationship, including the terms of the contract, but also how the arrangement works in practice.

This was a deliberate change. In 2022, two High Court decisions (Personnel Contracting and Jamsek) said that where there is a comprehensive written contract, the focus should largely be on what the contract says. Section 15AA reverses that approach. A well-drafted contractor agreement is now a starting point, not a shield.

There is one narrow exception. Contractors earning above the contractor high income threshold can, in some circumstances, give notice to opt out of section 15AA so that their contract terms govern the relationship. For most ABN arrangements, though, section 15AA applies in full.

The recent case: when the role outgrew the contract

In a decision handed down on 7 July 2026 ([2026] FWC 2544), the Commission found that a remote worker engaged as an independent contractor was in fact an employee.

On paper, everything pointed to a contractor. She was engaged in July 2025 under an “Appointment Setting Services Agreement”, had her own ABN, invoiced monthly, managed her own tax and super, used her own laptop and phone, received no leave, was free to work for others, and was paid commission.

Over time, her role grew from booking appointments to closing sales, and her commission rose from 5% to 15%. When the business ended the arrangement in October 2025, giving two weeks’ notice and cutting her system access the same day, she brought a general protections claim. The business argued she was never an employee, so there was no dismissal.

The Commission disagreed. It found that:

  • the business controlled how the work was done. She had to use its CRM, Zoom account, calendar and sales deck, with no room to use her own materials
  • every lead came from the business’s own marketing, and she owned none of the clients
  • she couldn’t delegate the work to anyone else
  • her work was central to the business, which depended on client sign-ups.
In short, she was working in the business, not in a business of her own.

The factors pointing towards contracting, such as her ABN, her own equipment, flexible hours and freedom to work elsewhere, were acknowledged but outweighed. The Commission also noted that tax, super and leave arrangements carry little independent weight, because they often just reflect what one party assumed the relationship to be.

The case also shows a common trap. The arrangement may have been genuine at the start, but the role quietly expanded and nobody revisited the contract.

Factors that point towards employment

No single factor decides the question. The Commission weighs the whole relationship. These indicators tend to point towards employment:

  • Control: the business directs how, when and where the work is done
  • Integration: the worker is part of the business, uses its systems, email and branding, and presents to clients as part of the team
  • No business of their own: the worker doesn’t advertise, has no other clients in practice, and can’t build goodwill
  • Personal service: the worker must do the work personally and can’t delegate or subcontract
  • Payment for time: the worker is paid by the hour, day or week, rather than for completing a defined result
  • Tools and equipment: the business supplies the tools, systems, vehicle or materials
  • No financial risk: the worker can’t make a profit or loss and isn’t responsible for fixing defective work at their own cost
  • Ongoing and exclusive: the engagement is open-ended, with regular hours and little real freedom to work for others
  • Expense reimbursement: the business pays the worker’s costs.
By contrast, a genuine independent contractor usually:
  • controls how the work is done and is engaged to deliver a result
  • runs their own business, with their own clients, insurance and branding
  • can delegate or subcontract
  • carries commercial risk and quotes or invoices for completed work
  • supplies their own tools and equipment.

Why it matters

Getting it wrong can be costly. A worker who is really an employee may be entitled to award wages, leave, superannuation and penalty rates, and can bring unfair dismissal and general protections claims. Misrepresenting an employment relationship as a contracting arrangement can also amount to sham contracting, which carries significant civil penalties.

Tax, superannuation, payroll tax and workers compensation each have their own tests. A worker can be a contractor for one purpose and an employee for another.

What businesses should do now
  1. Audit your contractor arrangements. Compare what the contract says with how each person actually works.
  2. Review roles that have changed. If a contractor’s duties, hours or integration into your business have grown, revisit the arrangement.
  3. Look at control and integration. If you set their hours, give them a company email and manage them like staff, they may be staff.
  4. Don’t rely on the ABN. An ABN, an invoice or a signed contractor agreement won’t hold up on their own.
  5. Get advice early. It’s far easier to restructure an arrangement now than to defend a claim later.
Need help? Explore Potential can review your contractor arrangements, assess risk under section 15AA, and help you put the right agreements in place. Get in touch with our team to start the conversation.
 
This article is general information only and does not constitute legal advice.