Using Freelancers or Contractors: What Every Business Needs to Know
Hiring freelancers or contractors can feel like a breath of fresh air. No long onboarding, no mountains of paperwork, and you can often get expert help without blowing the budget. For small business owners and solo operators especially, bringing someone in on a project-by-project basis can make a lot more sense than a full-time hire. But before you dive into a casual working relationship with your next contractor, it’s worth slowing down and checking the fine print.
Because if there’s one thing the law doesn’t love, it’s murky arrangements. Especially ones where someone might legally be considered an employee, even if you’ve both agreed to call it something else. The difference between an employee and a contractor might seem harmless on the surface, but getting it wrong can open a legal can of worms you really don’t want to deal with. Let’s walk through the key areas where legal issues often pop up, and how to handle them like a pro.
Employee vs Contractor , Why the Difference Matters
At a glance, a contractor is someone who works independently and sends you an invoice for their time. An employee, on the other hand, is on the books. They usually have set hours, might wear your logo, and you pay their tax and super for them.
But legally, it’s not what you call the relationship that matters, it’s how it actually plays out in real life. The ATO and Fair Work Australia look at a bunch of factors to decide whether someone is truly a contractor. These include how much control you have over how they do the work, whether they use their own tools, who carries the risk if something goes wrong, and whether they work for other people as well.
If someone is showing up regularly, working only for your business, using your equipment, and taking instructions from your team, then chances are the law sees them as an employee, even if they’ve got an ABN and invoice you each fortnight. And that’s where things can start to get messy.
Why does it matter so much? Because the consequences of misclassifying someone can include having to pay backdated super, leave, and other entitlements, as well as possible penalties from the tax office or Fair Work. Not to mention the time, stress, and potential reputational damage if a dispute ends up public.
Sham Contracting , A Legal Trap to Avoid
Sham contracting is when a business tries to disguise an employment relationship as an independent contract. It’s not always done with dodgy intentions. Sometimes people just don’t know the rules or assume that a signed contractor agreement is enough to cover them.
But if a contractor is effectively working like an employee, and the arrangement is set up to avoid paying entitlements, then Fair Work might call it out as a sham. And that can trigger some pretty hefty fines.
We’ve talked with the guys at Podmore Legal about this, and they mentioned how often small businesses stumble into this without realising the consequences. It’s not just about the paperwork, it’s how the relationship actually works day to day.
A common red flag is when the business has all the power in the relationship. If the contractor doesn’t really get to decide when or how the work is done, and there’s an ongoing expectation of work without much freedom to take on other clients, then it starts to look less like an arms-length arrangement and more like a typical job.
There have been several high-profile cases where businesses were hit with big penalties for this. Courts have shown that they’re not interested in technicalities, they’ll look at the actual working arrangement. So even if someone agrees to work as a contractor, that doesn’t automatically make it legal.
The safest bet is to get advice if you’re unsure. A bit of upfront clarity can save you from a legal headache later on.
Superannuation and Other Entitlements
Here’s something that surprises a lot of business owners: you might have to pay super for your contractors. Even if they’re not employees. If someone is paid mostly for their labour, and not for supplying materials or hiring others to help, then you might be legally required to make super contributions for them under the Superannuation Guarantee rules.
It’s one of those areas where the fine details really matter. If you’re paying someone to physically show up and do the work themselves, chances are you’ll need to factor super into your budget. And if you don’t, the ATO can come knocking later, asking for back payments plus interest.
Beyond super, there’s also the risk that other entitlements could apply if someone was wrongly treated as a contractor. Think annual leave, sick leave, redundancy pay, and so on. That’s where misclassification can become really costly.
Even state-based rules can come into play. In some states, payroll tax or workers comp premiums could be triggered by certain contractor relationships. It’s a bit of a maze, and the rules aren’t always intuitive, which is why having a second pair of legal eyes on things can be a good move.
The ATO has a handy Super Decision Tool online that can help work this out, but it’s still worth checking in with an accountant or workplace lawyer if anything feels borderline.
Who Owns the Work? Intellectual Property and Confidentiality
This one catches people out more than you’d think. In Australia, if a contractor creates something for your business , like a logo, code, design, or article , they actually own the copyright by default, unless the contract says otherwise.
Yep. You paid for it. It was made for you. But legally, the creator still owns it unless they’ve assigned the rights over in writing. This can create a real mess down the track, especially if the relationship turns sour or you want to repurpose the work for something else.
That’s why a solid contractor agreement should always include a clear intellectual property clause that says the business owns any work created as part of the job. If this bit’s missing, it could cost you later, whether in disputes or lost control over how the work gets used.
And while we’re on the subject of keeping things tidy, a confidentiality clause never hurts either. Especially if your contractor is working with client data, trade secrets, or anything else you wouldn’t want floating around. It doesn’t need to be complicated , just clear enough to spell out what needs to stay in-house.
Contracts and Best Practices
Every contractor relationship should be backed by a written agreement. It doesn’t have to be a 50-page document written in legalese. It does need to clearly explain what the job is, what the deliverables are, how the person will be paid, and who owns what.
A few things that belong in any good agreement: a proper scope of work, timelines, payment terms, and an IP clause. It should also cover confidentiality, how either party can end the agreement, and what happens if someone fails to deliver or wants out early.
Insurance can be another one to keep an eye on. You don’t want to find yourself on the hook if a contractor damages property or gives bad advice. Some agreements will require contractors to have their own insurance , and it’s smart to ask for proof.
If you’re pulling templates from the internet, make sure they actually fit Australian law. Better yet, run them past a local lawyer at least once so you can spot any weird gaps or assumptions. That small up-front cost can save you a world of bother down the line.
What to Do If You’re Unsure
If your contractor arrangement feels a bit blurry, it probably is. That doesn’t mean you need to panic. But it does mean it’s worth getting some advice before things go sideways.
Start by checking the ATO and Fair Work websites , they’ve both got clear guidelines and tools to help you figure out if someone counts as a contractor or employee. If you’re still not sure, call an accountant or employment lawyer. Many offer short consults just to run through your situation.
It’s better to adjust your setup now than get caught later with a complaint or audit. Misclassifications can be expensive to unwind. But if you spot the risks early, most things can be fixed with a clear contract and a better process going forward.
For existing contractors you’re already working with, it’s not too late to tidy up the paperwork. A quick check-in to confirm expectations and update the agreement can go a long way in keeping everything above board.
Wrapping It All Up
Freelancers and contractors can be a brilliant way to get things done without the commitment of a full-time hire. But flexibility doesn’t mean skipping the legal stuff. A few wrong assumptions and you could end up in hot water over super, wages, or IP rights.
With clear contracts, good communication, and a basic understanding of your legal responsibilities, you can avoid the common traps and build professional relationships that actually work for both sides. And if things start to feel fuzzy, ask for help early. It’s far easier to tweak the setup now than clean up a legal mess later.
A bit of clarity now means less worry down the track , and a smoother ride for everyone involved.
