December 23, 2017

Have I hired a contractor or an employee at my startup?

Have I hired a contractor or an employee?

Updated: 8 December 2019

Understanding the difference between an employee and contractor can save you a lot of money and help you avoid disputes with your workers. 

Too busy to read on? check out our 47 second summary video below.

Do you know how you have classified your worker? that is, if they an employee or a contractor? Do they know how they have been classified?

If you have a written agreement that clearly outlines your relationship with your worker then that's great. However, if not and you have a verbal arrangement that has become confusing, read on. 


So how do you know if you've hired a contractor?

If you have hired a contractor it is likely that they will work on your startup this way:

  • autonomously with little or no direction
  • sets their own work hours.
  • uses their own tools and equipment to get the job done e.g. laptop
  • has and uses an ABN
  • pays their own taxes
  • pays their own superannuation
  • usually has their own insurance policy
  • does not receive paid annual leave

If your worker meets the criteria above, you may also wish to read up on our tips for hiring a contractor.


It follows then if you have not got a worker with characteristics above it is likely they are an employee.  And if you've hired an employee, it is likely that you: 

  • set their work hours
  • pay them directly into their bank account At regular intervals
  • provide them with the tools and equipment they need to get their job done
  • deduct tax from their pay
  • pay them superannuation
  • supervise or direct the work that  they complete
  •  pay them annual leave

It's important to note that the courts will not look at one single factor. Rather, courts will look at the totality of the relationship to determine if  your worker is an employee or a contractor. 

Help for incorrectly classifying a worker

If you are still unsure whether you have hired a contractor or employee, be sure to get legal advice quickly. 

A lawyer may be able to help you negotiate a settlement with the incorrectly classified worker in a way that protects and stops court action against your business.


Terms of settlement or a deed of release summarise the incorrect classification issue and what will actions need to be taken to resolve it e.g. payment of annual leave, superannuation or a fixed amount of money.

Importantly, the terms will have a  release clause to end the situation quickly and stop the worker from starting legal action against you including court etc.

Key points

Below are the key points to keep in mind when hiring a worker:

  • Make sure your arrangements with your workers are clear.
  • Check the criteria above, and fair work's page to determine if you have hired an employee or contractor.
  • Speak to a lawyer if you are unsure.
  • Look at ways to minimise damage from any incorrect classification - a lawyer can help you do this.

Got questions or comments about hiring a worker? Be sure to leave them below. 

I wish you success in your ventures!

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, Vivian advises Australia's top entrepreneurs on business and employment matters. Clients benefit from Vivian's commercially focussed and pragmatic legal advice, business experience, and commitment to deliver the best quality business legal services to her clients.

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