Building a Team: Employees and Contractors

Hiring is one of the biggest steps a founder takes. Getting it right means understanding your obligations before someone starts work - not scrambling to figure them out afterwards.

Before you recruit, decide whether you actually need an ongoing team member or whether the work is better suited to a contractor on a project basis. Employees give you more control over how and when work is done, but they come with minimum entitlements, tax withholding, superannuation, workers' compensation insurance, and ongoing management overhead. Contractors are simpler to engage for defined deliverables, but misclassifying someone as a contractor when the relationship is really employment can expose your business to significant penalties.

Plan ahead. Before your first hire, you will need an ABN, registration for PAYG withholding with the ATO, a workers' compensation policy (mandatory in every state and territory), and a compliant employment contract or contractor agreement. If you will be paying wages, you should also have a payroll system set up to handle tax, super, and reporting through Single Touch Payroll (STP).

The distinction between an employee and an independent contractor is one of the most important - and most misunderstood - areas of Australian employment law. The label you put on the arrangement does not determine the outcome. What matters is how the relationship actually works in practice.

The law in this area changed significantly in 2024. Under the Closing the Loopholes reforms (which took effect in August 2024), courts and the Fair Work Commission now look at the real substance of the working relationship - not just what your contract says. So even if you have a well-drafted contractor agreement, it will not protect you if the day-to-day reality looks more like employment.

In practice, this means decision-makers look at the whole picture: how much control you have over when and how the work gets done, whether you provide the tools, whether the worker can say no to jobs or send someone else in their place, and whether they genuinely run their own business or just work for you. If the answer to most of those questions points toward employment, that is what it is - regardless of what the contract says.

The Fair Work Act 2009 (Cth) sets out 11 minimum employment entitlements known as the National Employment Standards. These apply to all employees in the national workplace relations system, regardless of what their contract says. You cannot contract out of the NES - any term that provides less than the NES minimum is unenforceable.

1. Maximum weekly hours - 38 hours per week for full-time employees, plus reasonable additional hours.
2. Requests for flexible working arrangements - eligible employees (including parents, carers, those with disability, those 55 or older, and those experiencing family violence) can request changes to their working arrangements.
3. Parental leave and related entitlements - up to 12 months of unpaid parental leave (with a right to request a further 12 months), plus the government-funded Paid Parental Leave scheme.
4. Annual leave - 4 weeks paid annual leave per year (5 weeks for certain shift workers).
5. Personal/carer's leave and compassionate leave - 10 days paid personal/carer's leave per year, plus 2 days compassionate leave per occasion.
6. Family and domestic violence leave - 10 days paid leave per year for all employees (including casuals), in effect from 1 February 2023 for small businesses.
7. Community service leave - unpaid leave for voluntary emergency activities, plus paid leave for jury service (minus any jury duty pay).
8. Long service leave - governed by applicable state or territory legislation, generally accruing after 7 to 10 years of continuous service.
9. Public holidays - paid day off on a public holiday (or penalty rates if they work), with a right to reasonably refuse a request to work.
10. Notice of termination and redundancy pay - minimum notice periods (1 to 5 weeks depending on length of service) and redundancy pay (4 to 16 weeks depending on length of service, for businesses with 15 or more employees).
11. Fair Work Information Statement - must be given to every new employee before or as soon as practicable after they start.

Modern awards sit on top of the NES and set industry-specific or occupation-specific minimum conditions - including minimum pay rates, overtime, penalty rates, allowances, and rostering rules. There are over 120 modern awards, and most employees in Australia are covered by one.

To find out which award applies to your employees, use the Fair Work Ombudsman's Find My Award tool. The award that covers an employee depends on the industry the business operates in and the type of work the employee does. If no award applies, the employee is award-free and their minimum terms come from the NES plus the national minimum wage (currently $24.10 per hour as of 1 July 2024, subject to the annual wage review).

Getting the award wrong - or paying below the minimum rate - is one of the most common compliance failures for small businesses. Underpayment claims can be pursued for up to 6 years, and the Fair Work Ombudsman actively investigates and enforces against businesses of all sizes. Use a modern payroll system that is updated with current award rates to reduce the risk.

Every employee should have a written employment contract. While verbal agreements can create a binding employment relationship, a written contract protects both parties and ensures clarity on key terms.

What to Include

• Job title, duties, and reporting structure
• Employment type (full-time, part-time, or casual)
• Start date and, if applicable, the duration (for fixed-term contracts)
• Remuneration - base salary or hourly rate, superannuation, and any bonus or commission structure
• Hours of work and location
• Applicable modern award or enterprise agreement (or a statement that none applies)
• Leave entitlements (at minimum, referencing the NES)
• Probationary period - typically 3 to 6 months
• Notice of termination requirements
• Confidentiality and intellectual property clauses
• Post-employment restraint clauses (if applicable)

Probation Periods

A probation period lets both parties assess the fit before the employment becomes more settled. Probation does not remove the employee's NES entitlements - they still accrue leave from day one. However, employees in small businesses (fewer than 15 employees) must complete 12 months of service before they can bring an unfair dismissal claim, and employees in larger businesses must complete 6 months.

Restraint Clauses

Post-employment restraint clauses (non-compete, non-solicitation) are enforceable in Australia only to the extent that they are reasonable in scope, duration, and geography. Courts will read them down or strike them out if they go too far. A 12-month non-compete covering all of Australia for a junior employee is unlikely to be enforced; a 6-month non-solicitation of clients the employee personally serviced is more likely to hold. Keep restraints proportionate to the employee's seniority and access to sensitive information.

If you engage independent contractors, a written contractor agreement is essential. It defines the scope of the engagement, protects your intellectual property, and helps demonstrate that the relationship is genuinely one of independent contracting rather than employment.

Key Terms to Include

• Scope of work - a clear description of the deliverables or services to be provided.
• Term and termination - the start and end dates, or milestones, and how either party can end the engagement early.
• Payment terms - fixed fee, hourly rate, or milestone-based; payment timeframe; and invoicing requirements.
• IP assignment - a clause assigning all intellectual property created during the engagement to your business. Without this, the contractor owns the IP by default under Australian law.
• Confidentiality - obligations regarding your proprietary information that survive the end of the contract.
• Insurance - a requirement that the contractor holds appropriate insurance (public liability, professional indemnity).
• Subcontracting - whether the contractor can delegate work to others.
• GST and invoicing - confirm whether the contractor is registered for GST and that invoices will comply with ATO requirements.

Engaging someone as a contractor when the relationship is really one of employment is known as sham contracting. It is a serious contravention under the Fair Work Act 2009, and the Fair Work Ombudsman actively investigates and prosecutes it.

Sham contracting can happen deliberately or by accident. Either way, the consequences are the same: the worker is treated as an employee, and you become liable for all unpaid entitlements (including superannuation, leave, and penalty rates) backdated to the start of the relationship, plus potential penalties.

Under the section 15AA "totality of the relationship" test, common indicators that a "contractor" may actually be an employee include:

• They work set hours dictated by you
• They use your equipment and tools
• They cannot subcontract or delegate the work
• They have no ability to profit from their own efficiency
• They work exclusively or primarily for your business
• They wear your uniform or use your branding
• There is no genuine negotiation of the contract terms
• They are integrated into your business operations rather than running their own independent enterprise

If more than a few of these factors apply, you should seriously reconsider the arrangement. Since the 2024 reforms, a well-drafted contract alone is not enough - the practical reality of how the worker is engaged is what matters. The ATO also has its own employee/contractor decision tool that can help you assess the relationship for tax and super purposes.

Once you start hiring employees, you need workplace policies. Policies set expectations, reduce risk, and demonstrate that your business takes compliance seriously. They are also a practical defence if a dispute arises - you can show that the employee was informed of the rules and the process you would follow.

At a minimum, most employers should have policies covering:

• Code of conduct - expected standards of behaviour and professionalism.
• Anti-discrimination and harassment - your obligations under federal and state anti-discrimination legislation, including the Sex Discrimination Act 1984 positive duty to prevent workplace sexual harassment.
• Work health and safety (WHS) - your duties under the applicable WHS legislation to provide a safe working environment. Each state and territory has its own WHS Act, though most are harmonised.
• Leave and attendance - how employees request and record leave, expected working hours, and absence procedures.
• Social media and technology use - acceptable use of company devices, email, and social media in the workplace.
• Grievance and dispute resolution - a clear internal process for raising and resolving complaints.
• Privacy - how you collect, store, and use employee personal information, consistent with the Privacy Act 1988.
• Family and domestic violence support - aligned with the paid family and domestic violence leave entitlement under the NES.

Policies should be written in plain language, provided to every employee on or before their start date, and reviewed annually to keep pace with legislative changes.