By Greg Allan, tradesman and creator of Data First Coaching
How does a builder tell if someone on site is a subcontractor or an employee?
Most builders assume the ABN on the invoice or the word written into the contract settles it. It does not. According to the ATO, the details of the actual working agreement, which can be written, oral or a mix of both, decide whether a worker on a job is a contractor or an employee for tax and super purposes.
The Fair Work Ombudsman adds a separate test for employment status. Since August twenty twenty four, certain businesses, mainly companies and sole traders or partnerships in the ACT or NT, must apply a whole of relationship test that looks at control over the work, who supplies tools and equipment, whether the work can be delegated, and whether there is an expectation the work will keep going. Other businesses use a start of relationship test instead, based on what was agreed when the arrangement began. The Contractors in building and construction page gives the example that “a builder could engage a concreter who has their own concreting business to lay concrete”, which is the everyday picture most builders already live inside without ever naming the test.
Does having an ABN or writing “subcontractor” in the contract settle it?
No. The Employee or contractor decision tool is blunt about this: having an ABN is not the deciding factor, and a written agreement calling someone a contractor does not override the real relationship if the facts say employee.
The ATO's own building and construction industry examples walk through a worker supervised on site, with deadlines checked, work that cannot be delegated, and the business supplying most of the tools. Those are employee characteristics, whatever the paperwork says. Super has its own twist too. The Super for independent contractors page confirms that a contractor paid mainly for their own labour, under a contract directly with the builder, for personal effort rather than a result, and who cannot send someone else to do the work, is treated as an employee for super guarantee purposes. It does not matter if they have an ABN.
What happens to your job margin if that labour lands in the wrong place?
Getting the test right matters for tax and super, but it is not where most builders actually lose money. You can classify a trade correctly on paper and still misplace the cost in your books, and that is where a healthy looking margin at lock-up quietly disappears by handover.
On a fixed price job or a cost plus job, every dollar of labour, whether it arrives as a subcontractor's invoice or an employee's wage, is a cost of that job. If the subbie's invoice gets coded to a general overhead line instead of sitting against the job, your gross profit margin on that job looks better than it is. Add a variation here, a progress claim milestone there, and the gap between what the job looks like it earned and what it actually earned only shows up once the final numbers are in, usually right around handover when there is nothing left to do about it.
This is not a compliance problem, it is a cost of sales problem, and it sits underneath the subcontractor versus employee question rather than being answered by it.
How can AI agents help a builder keep subcontractor and employee costs against the right job?
An AI agent is software that does a job the way you would do it yourself, using your prices, your wording and your rules, instead of you doing that paperwork by hand. For a builder juggling fixed price and cost plus contracts at once, that is the difference between every subcontractor invoice and every employee timesheet landing against the right job automatically, and those costs sitting in a general ledger bucket until someone has time to sort them out, usually after the job is finished.
This works best when it starts data first: from your own job records and your own chart of accounts, not from a generic rule about what a subcontractor invoice should look like. An agent built around how your jobs actually run can flag a labour cost sitting outside a job code before the next progress claim goes out, so the margin you see mid job is the real one, not a guess that gets corrected at handover.
This is general information, not legal, tax or employment advice. Check your own situation with the body named here or a qualified adviser.
Where can you check the current rules?
- How to work out employee or contractor: the ATO's test for tax and super purposes, including how companies, trusts and partnerships are always treated as contractors.
- Contractors in building and construction: Fair Work Ombudsman guidance on the whole of relationship test and start of relationship test, with building trade examples.
- Building and construction industry examples: worked examples of employee and contractor characteristics on a building site.
- Super for independent contractors: when a contractor must still be treated as an employee for super guarantee purposes.
- Employee or contractor decision tool: a practical tool and common myths, including the ABN myth.
- Whole of relationship test: detail on how the test works and why there usually is not one deciding factor.
How does Data First Coaching approach this?
Data First Coaching starts from the builder's own job and finance data through the Trade Business Intelligence, not from the classification question on its own. Greg looks first at where labour costs, subcontractor and employee alike, are actually landing against each job, because that is usually where a margin problem starts, long before it shows up at handover. Greg makes the point that “good quality trades people is an investment”, and that the relationship only pays off if the cost of it sits in the right place in the books. The how of setting that up is worked through inside the Academy, with members, because the Trade Business Intelligence is powered by every member who is open minded, innovative and willing to share what they learn.
Looking for a business coach who starts from your numbers? Builder Business Coach or every answer for builders.
