ABN or TFN? Getting worker classification right — and staying clear of sham contracting

In labour and trades work, you'll hear it constantly: "just put them on an ABN." It sounds simpler — no PAYG, no payslips, no super to worry about, the worker "runs their own show." The problem is that for a lot of these workers, an ABN is the wrong classification, and getting it wrong has a name in the Fair Work Act: sham contracting.

This isn't a grey-area technicality. It's one of the most common — and most expensive — mistakes in our industry. Here's the plain-English version.

TFN vs ABN — what you're actually choosing

• TFN (employee): the worker is your employee. You withhold PAYG tax, pay superannuation, accrue their leave (if they're not casual), pay them to the relevant award, and give them payslips. Their tax file number sits behind all of it.
• ABN (independent contractor): the worker genuinely runs their own business. They invoice you, sort out their own tax and super, carry their own insurance, and typically work for multiple clients on their own terms.

The label isn't a free choice. It's supposed to describe the relationship — not disguise it.

What sham contracting actually is

Sham contracting is when an employer treats someone who is really an employee as an independent contractor — usually to avoid paying super, leave, workers' comp or award rates. Under the Fair Work Act it's unlawful to:

• tell an employee they're an independent contractor when they're not;
• dismiss (or threaten to dismiss) an employee to re-engage them as a contractor for the same work; or
• knowingly make a false statement to persuade someone to become a contractor.

It doesn't matter that the worker signed an ABN agreement, or even that they wanted the ABN. If the relationship is really employment, calling it contracting doesn't make it so.

The 2024 change that flipped the test

This is the part that catches businesses relying on old advice.

Until recently, courts leaned heavily on the written contract to decide employee-vs-contractor. If the paperwork said "contractor", that carried a lot of weight. From 26 August 2024, the "Closing Loopholes" reforms changed the approach: you now look at the whole of the working relationship — the real substance and day-to-day practice, not just the words in the contract.

So a contract that says "independent contractor" no longer saves you if what's actually happening looks like employment.

The signals that a worker is really an employee

No single factor decides it — you weigh the whole picture. But the more of these that are true, the more likely the person is an employee, ABN or not:

• You control how, when and where they work, not just the result.
• They work set hours for you, ongoing, rather than job-by-job.
• They use your tools, equipment and materials.
• They're paid for time (per hour/day), not for producing a result.
• They can't really delegate the work or send a substitute.
• They're integrated into your business — they look, to an outsider, like part of the team.
• They don't genuinely carry commercial risk or work for other clients.

A forklift operator you roster every week, who uses your gear and works under your supervision, is almost certainly an employee — no matter what the ABN paperwork says.

What it costs to get wrong

If a worker is reclassified as an employee, the bill can include:

• Unpaid superannuation, plus the ATO's super guarantee charge (interest and admin on top).
• Back-paid leave and award entitlements.
• Payroll tax and workers' comp you should have been paying.
• Civil penalties for the sham-contracting breach itself — per contravention, and materially higher for serious or systematic conduct.
• The reputational hit, which in a referral-driven industry is its own cost.

"We didn't know" is a weak position — and since the 2024 changes, the employer's defence turns on whether your belief that the person was a contractor was reasonable, not merely honest.

How to get it right

• Start from the work, not the wish. Ask what the relationship actually looks like day to day, then classify to match.
• If in genuine doubt, treat them as an employee (TFN). It's the safer default for ongoing, supervised, time-based work.
• Reserve ABNs for genuine contractors — people running a real business, invoicing, carrying their own insurance, free to work for others.
• Use the ATO's employee/contractor guidance (linked below) — it walks through the factors, and the ATO and Fair Work take the same substance-over-form view.
• Get advice for the borderline cases. A short conversation with your accountant or a workplace lawyer is far cheaper than a super shortfall found three years later.

Where Calima sits

We keep TFN and ABN as genuinely separate arrangements — because they are separate. Our on-hired workers are our employees: paid to the award, with super, PAYG and workers' comp handled, on proper payslips. Where we engage genuine contractors, that's a real, distinct commercial arrangement — never an employee dressed up to save on on-costs.

That's not us being cautious for the sake of it. When you use a labour hire provider, their classification problem can become your problem. Using a provider that gets this right is part of what you're actually paying for.

This is general information, not legal or tax advice — for your own situation, check the Fair Work Ombudsman and ATO links below, or ask us and we'll point you the right way. If you're weighing the numbers behind employees, casuals and labour hire, our true-cost breakdown covers it, and if you're not sure a provider is above board, our licensing guide shows you how to check.