Worker misclassification is one of the ATO's priority compliance areas. For bookkeepers, the risk is practical: a client who classifies workers as contractors when they are legally employees may have years of PAYG withholding and superannuation guarantee liabilities building up. When the ATO audits and reclassifies those workers, the resulting bill — including penalties and interest — can be substantial enough to threaten the business.
Understanding the current ATO tests, knowing what to look for in your clients' payment records, and knowing when to escalate are essential bookkeeper competencies.
The Legal Position After 2024
Following two significant High Court decisions — ZG Operations v Jamsek and Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting — and the ATO's subsequent guidance, the test for whether a worker is an employee or contractor is based on the totality of the contractual relationship, not solely on the practical conduct of the parties.
In plain terms: if the contract says someone is a contractor, that matters — but it is not conclusive. The ATO still looks at whether the substance of the arrangement is consistent with contracting. A written contractor agreement paired with working arrangements that look exactly like employment is still a risk.
The Key Factors in the ATO's Assessment
The ATO assesses contractor vs employee status by looking at a range of factors. No single factor is determinative — it is the overall picture.
Ability to sub-contract or delegate. A genuine contractor can engage others to do the work in their place. An employee cannot. If a worker provides services personally and cannot delegate, this points toward employment.
Basis of payment. Employees are generally paid for their time (hourly or salaried). Contractors are typically paid for a result or output, or charge based on a quote or invoice. Payment on a timesheet basis looks like employment.
Equipment and tools. Genuine contractors typically supply their own equipment and materials. Employees use the employer's tools. A worker who uses the client's tools exclusively is more likely to be an employee.
Risk. Contractors bear financial risk — if they do the work badly, they fix it at their own cost. Employees do not bear this risk. If a worker is indemnified against defective work, that looks like employment.
Integration into the business. Is the worker an integrated part of the business, with a business email, a desk, and access to internal systems? This points toward employment. A contractor who works primarily for other clients looks more like a genuine contractor.
Exclusivity. Contractors typically work for multiple clients. If a worker works exclusively for one client and is available whenever called upon, this pattern resembles employment.
| Factor | Points to contractor | Points to employee |
|---|---|---|
| Delegation | Can sub-contract or delegate | Provides services personally |
| Basis of payment | Paid for a result or output | Paid for time, hourly or salaried |
| Equipment and tools | Supplies own equipment | Uses the client tools exclusively |
| Risk | Bears financial risk | Indemnified against defective work |
| Integration | Works for other clients | Business email, desk, internal systems |
| Exclusivity | Multiple clients | Works exclusively for one client |
What Bookkeepers Should Check
When reviewing a client's payroll and contractor records, look for these red flags:
Regular, consistent payments to the same ABN. A contractor who receives weekly or fortnightly payments in identical amounts, for months or years, looks like an employee on a different piece of paper. The payment frequency and regularity alone are not conclusive, but combined with other factors they are significant.
No invoices from the "contractor." If your client is paying contractors but there are no tax invoices in the records, you have a problem. Genuine contractors invoice for their work. Payments without invoices may be informal employment arrangements.
Workers without their own ABN. Before making payments to contractors without withholding PAYG, clients must check that the contractor has a valid ABN. If they don't (or if the ABN is cancelled), withholding at 47% applies. The ATO's ABN lookup service should be used to verify.
Long-term "contractors" who work exclusively for one client. Duration alone isn't the issue — some contractors have long-term relationships with a single client under genuine arms-length arrangements. But long tenure combined with exclusivity, no sub-contracting, and personal tools supplied by the client is a concerning pattern.
PAYG Withholding and Super Guarantee Obligations
If the ATO reclassifies a worker as an employee, two significant obligations arise retroactively:
PAYG withholding. The employer must have withheld PAYG from the worker's wages. If they didn't, the ATO assesses the employer for the unpaid withholding amount — plus the Failure to Withhold penalty.
Superannuation guarantee. Employers must pay super at the current rate (11.5% in 2025-26) on ordinary time earnings for employees. Unpaid super triggers the Superannuation Guarantee Charge (SGC), which is calculated on a broader base than the super guarantee and is not deductible. An SGC liability for multiple years of misclassified workers can be financially devastating.
Note also: super guarantee obligations apply to some contractors even when they are correctly classified as contractors — specifically, workers engaged wholly or principally for their labour are entitled to super regardless of their contracting status.
What to Do If You Identify a Risk
If you identify indicators of potential misclassification in a client's records, do not ignore them or try to resolve the issue through bookkeeping entries. Escalate to the client's accountant or a tax lawyer.
The ATO's Voluntary Disclosure program allows clients to come forward before an audit and receive reduced penalties. Acting proactively is significantly better than waiting for an ATO review.
Document your concerns in writing when you raise them — this protects you professionally and ensures the issue is on record.