Following two landmark High Court decisions, the ATO has clarified how businesses should determine whether a worker is an employee or an independent contractor. These changes have important implications for payroll tax, superannuation, PAYG withholding and Fair Work obligations.
High Court decisions that reshaped the rules
The changes stem from two High Court cases decided in 2022:
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Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd
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ZG Operations Australia Pty Ltd v Jamsek
Together, these cases reshaped how the employee versus contractor distinction is assessed under Australian law.
Personnel Contracting case: Labour hire worker was an employee
In the Personnel Contracting case, the High Court found that a labourer engaged by a labour hire company was an employee, despite being labelled a contractor.
The key factors were:
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The labour hire company had the right to control how, when and where the labourer worked
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The company’s core business asset was its ability to supply a compliant workforce
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The labourer worked under the supervision and direction of others
The Court made it clear that simply calling someone a contractor does not determine their status. This decision overturned an earlier Full Federal Court ruling that had applied a multifactorial test and reached the opposite conclusion.
Jamsek case: Truck drivers were independent contractors
In contrast, the High Court ruled in the Jamsek case that two truck drivers operating through partnerships were not employees.
Key points included:
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The drivers supplied their own trucks
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They operated through business structures
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The arrangement was consistent with long-standing treatment of transport operators as contractors
The Court confirmed that, in this context, the relationship was characteristic of independent contracting rather than employment.
ATO response: Taxation Ruling TR 2023/4
In response to these decisions, the ATO released Taxation Ruling TR 2023/4.
The ruling confirms that whether a worker is an employee under the ordinary meaning of the term is a question of fact, determined by an objective assessment of the legal rights and obligations between the parties.
Why the written contract now matters most
Under the ruling, where the parties have:
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Fully documented their relationship in a written contract
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Not challenged the contract as a sham
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Not varied, waived or replaced the contract
Then the written contract alone is the primary source used to determine the worker’s status.
Importantly, how the parties actually behave in practice cannot be used to recharacterise the relationship, unless that conduct is relevant to establishing the terms of the contract or challenging its validity under contract law.
Traditional employment indicators still apply, but differently
Indicators such as:
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Control or right to control
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Ability to delegate or subcontract work
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Responsibility for risk
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Ability to generate goodwill
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Working to achieve a result
Still matter, but only to the extent that they are reflected in the legal rights and obligations set out in the contract.
They are no longer assessed by looking at day-to-day work practices alone.
Holistic assessment of the contract
The ruling emphasises that determining worker status requires a holistic review of the contract as a whole.
This involves stepping back and forming an informed, qualitative view of the overall legal relationship, rather than focusing on individual clauses in isolation.
Practical Compliance Guideline PCG 2023/2
Alongside the ruling, the ATO released Practical Compliance Guideline PCG 2023/2.
This guideline outlines how the ATO will approach compliance and enforcement where businesses engage workers and classify them as employees or independent contractors. It provides guidance on risk areas and the likelihood of ATO review.
What this means for businesses
Businesses should:
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Review all contractor agreements carefully
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Ensure contracts accurately reflect the intended relationship
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Avoid relying on labels alone
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Seek advice where arrangements may sit near the boundary
Misclassification can lead to significant liabilities, including unpaid superannuation, PAYG withholding, penalties and interest.
Speak to our accountants
Speak to one of our accountants if you have any questions about the changes in tax for 2023.
