Contractor or Employee The Practical Risk for NFPs and Charities
Not-for-Profit’s (NFP) and charities often use contractors for good reasons. Specialist consultants, facilitators, evaluators, IT providers, trainers, finance support and project advisers can bring capability that the organisation does not need, or cannot afford, on an ongoing employment basis.
Contracting can be part of a sensible workforce strategy.
The risk arises when contractor arrangements are used for work that is really employment.
In the NFP sector, this risk is common. A program role is funded for 12 months, so the person is asked to invoice through an ABN. A former employee returns as a contractor to deliver similar work. A project worker attends team meetings, uses internal systems, follows organisational policies and works regular hours, but is paid by invoice. A consultant becomes embedded in operations over time.
These arrangements may feel practical. They may also create legal, financial and governance exposure.
An ABN is not a legal shield
An ABN is an Australian Business Number. A sole trader may have an ABN and issue invoices.
An ACN is an Australian Company Number. It identifies a company registered with ASIC. A company contractor may have both an ACN and an ABN.
These distinctions matter for contract administration, tax, insurance and procurement. They do not, by themselves, decide whether the worker is a genuine independent contractor.
The ATO is clear that superannuation may still be payable for contractors who are paid mainly for their labour. This can apply even where the contractor quotes an ABN.
That point is often missed. An organisation may believe it has avoided employment obligations by requiring an ABN, while still carrying superannuation or other compliance obligations.
The Fair Work test has changed
From 26 August 2024, many businesses must use the whole of relationship test to work out whether a worker is an employee or an independent contractor. Fair Work describes this as considering the real substance, practical reality and true nature of the relationship, including the contract terms and how the arrangement works in practice.
This is particularly relevant for NFPs because the written contract often says one thing while the working reality says another.
A contractor agreement may describe independence, discretion and deliverables. In practice, the worker may have set hours, a supervisor, internal reporting requirements, staff email access, regular team meetings and little ability to delegate work.
The practical relationship matters.
Indicators of genuine contracting
A genuine contractor is usually operating their own business. They are engaged to deliver a defined service or outcome. They may have control over how the work is performed, carry commercial risk, provide their own tools or systems, advertise to the market, work for other clients and have the ability to delegate or subcontract the work where the contract allows.
A strong contractor arrangement usually has:
+a clear scope of work
+defined deliverables
+limited organisational control over method
+payment linked to outcomes, milestones or services
+appropriate insurance
+the ability to work for others
+responsibility for rectifying defective work
+genuine business independence
This is why many consulting, legal, accounting, evaluation, IT and specialist advisory arrangements are appropriately structured as contractor or consultancy engagements.
Indicators of employment risk
Employment risk increases where the person is working in and for the organisation.
Warning signs include:
+regular hours set by the organisation
+close supervision by a manager
+payment based on time worked rather than deliverables
+use of organisational systems, equipment and email
+little or no ability to delegate the work
+inclusion in staff rosters, supervision and internal meetings
+ongoing work with an expectation of continuation
+work that is central to program delivery
+a former employee doing similar work as a contractor
+the contractor arrangement being used because employment feels administratively difficult
In NFPs, the most common risk areas are project officers, program coordinators, community engagement workers, trainers, facilitators, casework support roles and interim operational management positions.
The more integrated the person is in the organisation, the more carefully the arrangement should be reviewed.
Sham contracting
Sham contracting occurs where a worker is represented as an independent contractor when they are actually an employee. Fair Work identifies sham contracting as unlawful and explains that it can involve misrepresenting an employment relationship as an independent contracting arrangement.
This is not only a technical HR issue. It can result in backpay, penalties, superannuation liabilities, payroll tax exposure, workers compensation issues, insurance gaps and reputational damage.
For charities, it can also become a governance issue. Workforce classification speaks to responsible stewardship, legal compliance and organisational integrity.
Fixed term employment is often the better option
Sometimes organisations use ABN contractors because the work is temporary.
That is not enough.
If the person is doing employee-like work under organisational direction, the better starting point may be fixed term employment rather than contracting.
A fixed term employee remains an employee. They receive employee entitlements. They are covered by applicable awards, the National Employment Standards and workplace protections. The contract may end at a defined date or event, but the person is not an independent business.
This distinction matters for grant-funded roles. Temporary funding may justify a fixed term employment contract. It does not automatically justify an ABN contractor arrangement.
Small organisations still need discipline
Some smaller charities and community organisations assume that informal arrangements are acceptable because the organisation is small, values driven or resource constrained.
That is a risky assumption.
Small business provisions may affect unfair dismissal timing or redundancy obligations in some cases, but they do not remove minimum employment standards. They do not remove superannuation obligations. They do not remove sham contracting risk. They do not turn an employee into a contractor. Good governance applies at every size.
A practical decision framework
Before engaging an ABN contractor, NFP leaders should ask:
+Are we buying a service or filling a role?
+Is the work defined by deliverables or by hours?
+Can the contractor decide how the work is done?
+Can the contractor work for others?
+Can the contractor delegate or subcontract?
+Who carries financial risk?
+Who provides the tools, systems and insurance?
+Is the person integrated into the team?
+Would this role otherwise be advertised as an employee position?
+Are we using an ABN because it is genuinely appropriate, or because it is easier?
These questions do not replace legal advice where the risk is material, but they will help identify arrangements that need closer review.
What boards should expect
Boards should not need to review every contractor agreement. They should expect management to maintain a contractor register and periodically review long-running or high risk arrangements.
A useful governance report would identify:
+current contractors and consultants
+length of engagement
+nature of work
+whether the contractor is a sole trader or company
+whether superannuation has been assessed
+whether insurance has been confirmed
+whether the arrangement has been tested against employment status indicators
+any contractor engaged for more than 12 months
+any contractor performing operational or staff-like work
This gives the board visibility without requiring it to manage operational contracting decisions.
Better contracting is better governance
Contractors play an important role in the NFP sector. The issue is not whether they should be used. The issue is whether they are being used for the right work, in the right way, with the right documentation.
An ABN is not enough. A written contractor agreement is not enough. A short-term funding cycle is not enough.
The working relationship must support the classification.
For NFPs, this is a practical governance discipline. Clear classification protects workers, reduces organisational risk and supports more sustainable workforce planning. It also helps ensure that employment models reflect the values the sector exists to advance.
If your organisation uses ABN contractors, especially in program, operational or long-running roles, a contractor classification review can identify risk early and support clearer, safer workforce decisions.
This article provides general information only and is not legal, tax or industrial relations advice. NFPs and charities should check current guidance from the Fair Work Ombudsman, the ATO and relevant state or territory regulators, and seek advice where contractor arrangements involve long running work, operational roles, former employees, grant funded positions or uncertainty about employment status.
