The Importance Of Knowing The Difference Between An Employee And A Contractor (2025 Updated)

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Do you know the difference between an employee and a contractor?

As the owner of a small business or startup, it is crucial for you to understand the differences between an employee and a contractor. Misclassification in today’s evolving workforce environment may lead to significant legal and financial repercussions for your company in 2025.

A recent Federal Court case involving Foodora is a prime example of this critical issue in today’s gig economy.

The Fair Work Ombudsman launched proceedings against Foodora for misclassifying some of its workers as contractors—a practice often referred to as “sham contracting”.

The Fair Work Commission found that these workers were, in fact, employees and were therefore entitled to benefits such as protection from unfair dismissal. This determination was largely based on the fact that their work conditions resembled those of casual employees, with Foodora exercising significant control over their hours and tasks.

To steer clear of such legal pitfalls in 2025, it is essential to clearly understand the factors that determine worker classification and the practical differences between employees and contractors.

Factors That Affect The Classification…

Degree Of Control Over How Work Is Performed & Hours Of Work

If your worker performs tasks under your direct supervision on an ongoing basis, they are more likely to be classified as an employee.

If they are granted greater autonomy and are free to determine how and when they complete their work, they are more likely to be recognised as an independent contractor.

In the Foodora matter, evidence clearly showed that Foodora exercised considerable control over its workers’ schedules and tasks—a key indicator favouring employee classification.

The company dictated shift times by setting start and finish times, specifying delivery locations, and even implementing a reward system that paid workers extra during peak periods.

When delivery workers have little to no control over their schedules, it strongly suggests an employee relationship as opposed to a contractor engagement.

Expectation Of Work

An employee is generally expected to have ongoing and continuous work.

By contrast, a contractor is typically engaged for a specific project or task, requiring a particular skill set.

In the Foodora scenario, workers received fixed shifts via an app—while the specific days and times varied each week, the structure resembled that of a casual employee engaged for continuous work.

The key takeaway here is that if you intend to engage workers as independent contractors, you must explicitly outline whether the role is a one-off project or an ongoing engagement.

Failing to clarify the nature of the work may lead workers to assume they are employees, resulting in adverse legal implications.

Tools, Equipment And Uniform

If you provide tools, equipment, or uniforms to your workers, this may indicate an employer–employee relationship.

Conversely, if the worker uses their own equipment, they are more likely to be considered an independent contractor.

For example, while many Foodora delivery riders used their personal bikes, the presence of a company-branded storage box and the requirement to wear branded t-shirts strongly suggested an employee connection.

Method Of Payment And Leave Entitlements

Regular pay cycles and statutory leave entitlements are typically indicators of an employee relationship.

Independent contractors, on the other hand, invoice for their work and manage their own tax obligations—they do not receive paid leave.

It is important to note that simply processing payments via an ABN or not providing leave does not automatically confer contractor status; these details must be considered in conjunction with other factors.

All these aspects need to be assessed collectively, as isolated details may not fully capture the nature of the working relationship.

Practical Differences – Risk, Superannuation And Tax

As an employer, you are legally accountable for the actions of your employees while they perform their duties under your contract.

In contrast, independent contractors generally assume responsibility for their own work output and any liabilities arising from it, often evidenced by holding their own insurance policies.

When it comes to superannuation, you must contribute to your employees’ super funds in line with current legislative requirements. For independent contractors, these obligations are limited unless specific conditions apply.

For instance, you are required to make super contributions to contractors if their contract is predominantly for labour services, if the payment is for their skill set rather than for achieving specific outcomes, and if the work performed strictly adheres to the contractual terms.

The contract is primarily for their labour;
The payment is for their skills rather than a specific result; and
The work performed is exactly as set out in the agreement.

A similar distinction applies to taxation. As an employer, you must withhold PAYG tax from wages, whereas contractors are responsible for managing their own tax affairs.

In the Foodora case, Foodora did not make the required superannuation contributions or withhold income tax—resulting in significant liabilities once the workers were reclassified as employees.

This example illustrates how an incorrect classification can quickly lead to considerable financial risk and increased compliance costs in 2025.

Terms Of The Contract

A key element in determining a worker’s status is the contract governing the working arrangement. Your agreement should clearly define the terms of engagement and specify whether the role is intended for continuous employment or a specific project.

The terms of the contract will also be scrutinised to determine whether they restrict the worker from providing services to other clients. If the contractual terms impose exclusivity similar to what is expected of an employee, then the worker is more likely to be classified as such.

If, however, the contract allows the worker the freedom to take on additional clients, this flexibility supports an independent contractor classification.

This principle was underscored in the recent ZG Operations Australia Pty Ltd v Jamsek and Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd decisions. It’s essential to keep up to date with how the law distinguishes between employees and contractors, as legislative reforms and case law continue to evolve into 2025.

What To Take Away…

Understanding the differences between an employee and a contractor is essential for any small business or startup owner. Clear classification ensures that you meet all your legal obligations, manage risks effectively, and avoid costly penalties.

If you’re ever in doubt about the status of your workers, it’s wise to consult with legal experts. Explore our legal advice for small businesses and review our resources on contractor versus employee classifications to ensure your business remains compliant in 2025.

In today’s dynamic work environment, making informed decisions about worker classification can help you optimise operational flexibility while safeguarding your business against legal and financial liabilities. Regularly reviewing and updating your contracts and workplace policies is essential—services such as our Contract Review and Redraft can ensure your agreements are in line with the latest legal standards. Taking these steps will help you remain compliant and competitive in 2025 and beyond.

Esha Kumar

Esha is a law graduate at Sprintlaw from the University of Sydney. She has gained experience in public relations, boutique law firms and different roles at Sprintlaw to channel her passion for helping businesses get their legals sorted.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.