When Your Subcontractor Isn’t Really a Subcontractor

Many Australian businesses hire subcontractors believing they’re buying a neat, all‑inclusive service: labour, materials, insurance, super — all bundled into one tidy invoice.

It feels simple.

It feels efficient.

But it’s often wrong, and it can leave your business exposed to superannuation breaches, WorkCover under‑reporting, and ATO/Fair Work penalties.

Genuine Subcontractors versus Deemed Employees

A genuine subcontractor runs their own business. They set their hours, supply their own materials, carry their own insurances, and take responsibility for their own superannuation.

But many “subbies” in Australia don’t operate this way.

• They invoice you weekly.

• They work only for your business.

• They use your tools, your materials, your job sites.

• You tell them when to show up and what to do.

• You tell them who does the work.

• Your business assumes responsibility for their work.

This is not subcontracting. This is a deemed employment relationship — and the law treats it accordingly.

Genuine subcontractors:

• Control how and when they complete their work

• Supply their own tools and equipment

• Invoice for their services rather than receiving wages

• Can subcontract work to others

• Bear the risk of profit or loss in their business

  
  

For example, a subcontractor hired to install cabinetry will decide their schedule, use their own tools, and invoice the main contractor upon completion. They are not supervised like an employee.

Superannuation: You Must Pay It Directly — Always

Here’s the part most business owners don’t realise:

The ATO states that if you pay a contractor mainly for their labour, they are treated as an employee for superannuation guarantee purposes, even if they have an ABN or invoice you. This means you must pay super directly to their fund, not to the contractor.

The ATO confirms:

• Contractors who are paid mainly for their labour are employees for SG purposes.

• You must make super contributions for independent contractors if the contract is mainly for their labour, they must perform the work personally, and payment is for their time/skills.

• Having an ABN, issuing invoices, or being called a contractor does not remove your SG obligation.

  
  

The Payday Super rule requires employers to pay superannuation contributions directly to the employee’s super fund. For deemed employees this is the labour part of the invoice ex gst.

Why This Matters More Than Ever

With Payday Super now in effect, the ATO has real‑time visibility of:

• Who is being paid

• When they are being paid

• Whether super was paid at the same time

• Whether the amounts match the labour component of invoices

Businesses that ignore deemed employee rules will be the first to be flagged.

Note: This extremely common in trades, construction, cleaning, admin, and labour‑only contracting.

Workers Compensation: You May Need to Declare Them

• Sole traders and company directors do not need their own WorkCover policy.

  But if they are a deemed worker, your business must:

  • Include their labour‑only amounts in your annual wage declaration, and

  • Ensure your WorkCover premium reflects their risk category.

  If WorkSafe audits your business and finds undeclared deemed workers, they can back‑charge premiums for multiple years — plus penalties.

  
  

Clear Actions to Get Organised

1. Review all subcontractors

Identify anyone who:

• Works mostly for you

• Uses your materials

• Works at your sites

• Has set hours

• Invoices weekly or fortnightly

These are your high‑risk “deemed employee” candidates.

2. Split invoices into labour vs materials

3. Add deemed employees to Xero

• Create an employee profile

• No pay items

• Enter super manually each time you pay their invoice

• Pay super on the same day as the invoice payment

4. Update your WorkCover declarations

5. Communicate clearly with your subcontractors

Explain that:

• Super cannot be included in their rate

• You must pay it directly

• It protects both parties legally

6. Build a compliance checklist into your onboarding

Every new subcontractor should be assessed before their first job.

Example Scenario

A landscaping company hires a subcontractor to maintain gardens. The subcontractor uses their own equipment, sets their hours, and invoices the company. This is a genuine subcontractor relationship. The company does not pay super but confirms the subcontractor holds their own WorkCover insurance.

If the subcontractor worked under close supervision, used company tools, and was paid a wage, they might be deemed an employee. The company would then need to pay super and include them in WorkCover.

Final Thought

Most businesses don’t intentionally get this wrong — they simply assume subcontractors are responsible for their own obligations. But the law is clear: if you control the work, you carry the responsibility.

Fixing this now protects your business, your workers, and your peace of mind.