Olivia is the Head of Legal at Lawpath, where she helps Australian businesses navigate complex legal challenges with practical, commercially minded advice. She specialises in employment matters, contract drafting, pre-litigation strategy, dispute resolution, commercial law and startup compliance, and has supported clients across technology, healthcare, professional services and retail. Olivia is passionate about making legal services accessible, personable and effective for every client.
The contractor vs subcontractor difference comes down to one question: who hired you? A contractor is engaged directly by the client to deliver a scope of work. A subcontractor is engaged by that contractor to deliver part of it, and answers to the contractor, not the client.
Sounds simple. It stays simple right up until a subcontractor’s work goes wrong, the client rings you, and you find out your subcontract doesn’t say what you assumed it did. Most business owners sort this paperwork after the dispute starts. You can sort it before.
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- A contractor works for the client. A subcontractor works for the contractor. The client and the subcontractor usually have no contract with each other at all.
- If your subcontractor gets it wrong, the client comes to you. You carry the full scope. Your remedy against the subcontractor is only as strong as your subcontract.
- You need two agreements, and they need to match. Whatever you promised the client (standards, insurance, record keeping) has to flow down into the subcontract.
- Labels don’t decide employee status anymore. Since 26 August 2024, the Fair Work Act looks at how the relationship works in practice, whatever your contract calls it.
- An ABN doesn’t switch off super. If you pay someone mainly for their own labour, 12% super can apply, and under Payday Super it’s due each time you pay them.
Contractor vs subcontractor: what’s the actual difference?
On the contractor vs subcontractor question, start here: both are independent businesses, not employees. Both invoice under an ABN, run their own tax and decide how the work gets done. What separates them is their position in the chain: client to contractor, contractor to subcontractor.
That position decides who you answer to, who pays you and who wears the risk. It’s also why the same tradie or consultant can be a contractor on Monday’s job and a subcontractor on Tuesday’s.
| Contractor | Subcontractor | |
|---|---|---|
| Engaged by | The client | The contractor |
| Answers to | The client, for the full scope | The contractor, for their portion only |
| Paid by | The client | The contractor |
| Manages | The whole job, including every subcontractor | Their own piece of the work |
| Agreement used | Contractor Agreement (Individual or Company) | Subcontractor Agreement |
| Construction payment rights | Can make payment claims against the client under state laws | Can make payment claims against the contractor, even if the client hasn’t paid |
| Super risk | The client may owe super if the contractor is paid mainly for labour | The contractor may owe super on the same basis |
What is a contractor?
A contractor is engaged directly by a client to deliver a defined outcome under a services contract. Think of a sole-trader bookkeeper on a 12-month engagement, or a fit-out company running an office refurb. They control how and when the work happens, and they carry the commercial risk if it goes badly.
If you’re engaging one, the paperwork depends on who you’re dealing with. An individual gets a Contractor Agreement (Individual). A Pty Ltd gets a Contractor Agreement (Company). Using the individual version for a company is one of the quieter mistakes we see, because the parties, insurance and liability wording all assume a person.
Contractor or employee? What the law looks at now
Calling someone a contractor doesn’t make them one. Since 26 August 2024, the Fair Work Act 2009 (Cth) has a statutory definition of employee that looks at the real substance and practical reality of the relationship, not just the written contract. It applies whether your business is a sole trader, partnership or Pty Ltd.
Courts and the Fair Work Commission weigh the whole picture, including:
- Control: who decides how, when and where the work gets done?
- Delegation: can they send someone else, or must they turn up personally?
- Tools and systems: do they bring their own, or work inside yours?
- Integration: do they look like part of your team, with your uniform and roster?
- Financial risk: can they make or lose money depending on how they run the job?
Two lesser-known details matter here. Individual contractors earning above the contractor high income threshold (set at $175,000 when the rules started, and indexed each year) can give you a written notice opting out of the new definition. And super, tax and workers compensation each use their own tests, so passing the Fair Work test doesn’t settle everything. Our explainer on the new employee and contractor definitions goes deeper.
Stakes went up too. Since 27 February 2024, a business accused of sham contracting has to show it reasonably believed the worker was a contractor. Getting advice before you engage someone is now part of how you prove that belief was reasonable.
What is a subcontractor?
A subcontractor is engaged by a contractor, not the client, to carry out a specific portion of the contracted work. Their obligations run to the contractor. The client has no direct contract with them unless someone has deliberately created one.
Here’s the contractor vs subcontractor chain in action. A builder signs a renovation contract with a homeowner, then brings in an electrician and a plasterer. Those trades are subcontractors. If the wiring fails inspection, the homeowner’s claim is against the builder, and the builder’s claim is against the electrician.
Same chain outside construction. A digital agency subcontracts a developer. An NDIS provider subcontracts support workers. A commercial cleaning company subcontracts crews to service its office contracts. The relationship is set out in a Subcontractor Agreement, which sits separately from the head contract with the client.
What about a subcontractor of a subcontractor?
Chains can run deeper. Your electrician might bring in a specialist data cabler, who becomes a sub-subcontractor. Liability still flows up the chain one link at a time: the cabler answers to the electrician, the electrician answers to you, and you answer to the client.
Here’s the catch: visibility. Many head contracts require the client’s consent for any subcontracting, at any tier. If your subcontract doesn’t make your subcontractor get your written approval before they bring someone else in, you can breach your head contract without knowing it happened.
Who is liable when a subcontractor gets it wrong?
You are. In almost every contractor vs subcontractor dispute, that’s the answer head contractors don’t want to hear.
You promised the client a scope of work. You chose to hand part of it to someone else. The client didn’t vet that person, didn’t negotiate with them and has no contract with them. So when their work fails, the client comes to you. What you recover from the subcontractor depends entirely on your subcontract.
That’s why the indemnity clause carries so much weight. You want the subcontractor to cover losses caused by their work, including claims the client makes against you. Without it, you absorb the hit and argue about recovery later.
One flag Lawpath lawyers raise regularly: don’t cap the subcontractor’s liability at a number that wouldn’t cover what you’d lose. A $5,000 cap on work under a $200,000 head contract looks like protection on paper. In a real claim, it barely dents the loss.
What if you lose the client contract because of a subcontractor?
This question comes up in our consultations, particularly from cleaning businesses that subcontract their crews. A subcontractor’s misconduct or poor performance costs you the client, and you want to know what you can claw back.
Two clauses do the heavy lifting. A termination clause that names serious misconduct, material breach and repeated poor performance lets you end the subcontract cleanly. A set-off clause lets you deduct your losses from money you still owe them. Without both, you’re left chasing a debt through a dispute.
Do you need the client’s permission to subcontract?
Read your head contract first. Many commercial agreements, especially in professional services and government work, require written client consent before anyone else does the work. The client hired you, not a stranger you picked.
Breach that clause and you’re in trouble regardless of how good the subcontractor’s work is. The fix takes five minutes: find the clause, request consent in writing and keep the email.
Silent contract? You can generally subcontract. Silence doesn’t move liability, though. You still answer to the client for every hour the subcontractor works.
How do you engage a subcontractor properly?
Most problems we see in contractor vs subcontractor arrangements trace back to a skipped step at the start, not a bad subcontractor. Work through these in order:
- Check the head contract. Look for consent requirements, insurance minimums, record-keeping rules, IP ownership and any sector rules (NDIS, child safety, government security).
- Define the exact scope you’re handing over. When our lawyers review subcontracts, vague scope is the issue they flag as most likely to end in a dispute.
- Check the subcontractor. Confirm their ABN, GST registration, licences and current certificates of currency for insurance.
- Sign a subcontract that mirrors the head contract. Flow down every obligation you’ve promised the client, then add indemnity, liability, set-off and termination terms.
- Induct them. Cover site rules, safety procedures and who they report to. Keep a record.
- Approve variations in writing before extra work starts. Price, time and scope, every time.
- Close out properly. Collect warranties, handover documents and confirm the defects period and final payment.
What should a subcontractor agreement include?
At minimum, cover these:
- Scope and deliverables: exactly what they deliver, with acceptance criteria.
- Payment terms: when payment is triggered and how quickly, not just a rate.
- Back-to-back obligations: your head contract requirements, flowed down.
- Indemnity: they cover losses caused by their work.
- Limitation of liability: sized to what’s at risk, often linked to fees and insurance cover.
- Set-off: your right to deduct losses from amounts you owe.
- Insurance: public liability at minimum, professional indemnity for advice-based work.
- IP ownership: who owns the deliverables and who keeps their background IP.
- Subcontracting consent: they can’t pass the work on without your written approval.
- Termination: notice periods, plus immediate termination for serious misconduct.
- Confidentiality and data: essential if they touch your client’s information.
Example clauses you can adapt
These are plain-English starting points, not finished drafting. Your final wording should match your head contract and your industry.
Flow-down: The Subcontractor must perform the Services in a way that allows the Contractor to comply with the Head Contract, and must comply with any Head Contract obligations that apply to the Services, including insurance, record keeping and audit requirements.
Indemnity: The Subcontractor indemnifies the Contractor against any loss, claim or cost arising from the Subcontractor’s breach of this agreement, or its negligent or unlawful act or omission in performing the Services.
Payment (construction): The Contractor will pay each valid payment claim within 15 business days of receiving it. Payment is not conditional on the Contractor receiving payment from the Client.
That last line matters more than it looks, which brings us to security of payment.
How do security of payment laws affect subcontractors?
If you work in building or construction, every state and territory has a security of payment Act that gives subcontractors a fast-track right to be paid. Subcontractors can serve payment claims and go to adjudication if you don’t respond properly within strict timeframes.
Watch out for the “pay when paid” clause. Making a subcontractor’s payment depend on the client paying you first is generally void under these laws. Your subcontractor can still pursue you even when your own client hasn’t paid a cent.
Rules, timeframes and notice formats differ between states. Victoria, for example, passed further payment reforms in 2025. Check the regime where the work is done. Our guide to the Security of Payment Act in NSW covers how claims and payment schedules work in practice.
What tax, super and reporting obligations come with subcontractors?
This is where an ABN gives business owners false comfort. Someone sends you an invoice, you pay it, job done. The ATO may see it differently.
Superannuation
Super guarantee uses its own extended definition of employee, separate from the Fair Work test. If you pay an individual mainly for their own labour, under a contract where they must do the work personally, super can apply even with an ABN and a signed subcontract.
Super sits at 12%. Since 1 July 2026, Payday Super means super is due within seven business days of each payday, not quarterly. A long-running labour-only arrangement can build up a large back-payment, so get accounting advice before you assume super isn’t owed.
ABN withholding and GST
No ABN on the invoice? You generally have to withhold 47% from the payment under PAYG withholding rules. Ask for the ABN before you pay.
Only GST-registered businesses can charge GST. Registration is compulsory at $75,000 annual turnover, so plenty of small subcontractors sit below it. If someone charges GST without being registered, you can’t claim the credit. Check their ABN details before paying any invoice with GST on it.
Taxable payments annual report (TPAR)
Businesses that pay contractors for building and construction, cleaning, courier and road freight, IT, or security and surveillance services must report those payments to the ATO by 28 August each year. Payments to subcontractors count. Our TPAR guide explains who has to lodge.
Payroll tax
Some states treat payments to certain contractors as wages for payroll tax. The rules and exemptions vary by state, so check with your accountant once your contractor spend starts growing.
What about safety, insurance and licences?
Work health and safety duties don’t stop at your employees. If you control a workplace or direct the work, you share safety duties with every subcontractor on it. Put your safety requirements in the subcontract, and actually run the induction.
On insurance, your subcontractor’s public liability policy covers them. It doesn’t necessarily cover you for how you managed the job. Hold your own cover, ask for certificates of currency before work starts, and diarise the renewal dates.
Licensing is state-based for trades like electrical, plumbing and building work. An unlicensed subcontractor can put your own licence and your client relationship at risk, so check before they start.
Can your subcontract be unfair?
Yes, and the penalties are real. Since 9 November 2023, using an unfair term in a standard form small business contract can attract significant penalties under the Australian Consumer Law. A business counts as small if it has fewer than 100 employees or turnover under $10 million.
Subcontract templates used on a take-it-or-leave-it basis are squarely in that zone. One-sided set-off, unilateral variation rights and harsh time bars draw the most attention. Separately, individual contractors earning under the high income threshold can now ask the Fair Work Commission to review unfair terms in their services contract. Here’s more on the unfair contract terms penalties.
What Lawpath lawyers see in contractor and subcontractor consultations
Across Lawpath legal consultations on contractor vs subcontractor arrangements, the same five problems keep surfacing:
- The subcontract contradicts the head contract. In one review, a subcontract required all documents to be destroyed at the end of the job, while the government head agreement required records kept for years. Sector rules like NDIS compliance and child-safety obligations get left out just as often. If it isn’t written into the subcontract, you can’t enforce it.
- No liability cap, or one that works against you. Our lawyers commonly recommend a cap tied to the subcontract fees and lined up with the subcontractor’s insurance, with carve-outs for things like fraud and confidentiality breaches. Read template caps closely: some limit what you can recover.
- The “they pay their own super” clause. Business owners ask us to add a clause saying the subcontractor handles their own super. A clause alone doesn’t settle it. How the work actually runs decides whether super is owed.
- Control creeps in. Rosters, uniforms, training shifts and step-by-step instructions slowly turn a subcontractor into something that looks like staff. It comes up repeatedly with cleaning and NDIS businesses. If that person later becomes an employee, their contractor years can also come back into play for entitlements like long service leave.
- Subcontractors push back, and that’s normal. Contractors using a template often get pushback on a one-sided indemnity. A mutual indemnity with a sensible cap is a common landing point that keeps the deal moving without giving away your protection.
Independent contractor vs subcontractor: is there a difference?
Sort of. “Independent contractor” describes legal status: not an employee, working under a services contract, running their own business. Head contractors and subcontractors can both be independent contractors.
“Subcontractor” describes position in the chain. A subcontractor answers to the contractor. In conversation people swap the terms freely. In your agreements, the chain needs to be clear. If you’re still deciding whether someone should be on the books instead, start with our guide to the difference between a contractor and an employee, then find the right employment contract if staff is the better fit.
Frequently asked questions
What is the difference between a contractor and a subcontractor in Australia?
The contractor vs subcontractor difference is about who hired whom. A contractor is engaged directly by the client; a subcontractor is engaged by that contractor to carry out part of the work. Contractors answer to the client; subcontractors answer to the contractor. The client and subcontractor generally have no direct contract.
Is a subcontractor liable to the client?
Normally not under contract. The subcontractor’s obligations run to the contractor, so the client’s claim is against the contractor. A subcontractor who causes harm through negligence can still face a separate claim outside the contract.
Can a contractor hire a subcontractor without telling the client?
It depends on the head contract. Many require written client consent before any subcontracting. If the contract is silent, you can generally proceed, but you stay fully accountable to the client for the subcontractor’s work.
Do subcontractors need their own ABN?
Subcontractors running their own business should have an ABN. If one doesn’t quote an ABN, you generally have to withhold 47% from the payment under PAYG withholding rules. Ask for the ABN before you pay.
Are subcontractors entitled to superannuation?
Sometimes. If you pay an individual mainly for their own labour, super guarantee at 12% can apply even with an ABN and a subcontract. Since 1 July 2026 it’s due within seven business days of each payday. Get accounting advice on labour-based arrangements.
Can a contractor refuse to pay a subcontractor until the client pays?
Not in building and construction. Pay when paid clauses are generally void under state security of payment laws, so a subcontractor can claim payment even if the client hasn’t paid the contractor. Set fixed payment timeframes instead.
Do I have to report payments to subcontractors to the ATO?
Yes, if you’re in building and construction, cleaning, courier and road freight, IT, or security services. You lodge a taxable payments annual report by 28 August each year covering payments to contractors and subcontractors.
What is sham contracting in Australia?
Sham contracting is misrepresenting an employment relationship as independent contracting. It’s prohibited under the Fair Work Act. Since 27 February 2024, a business must show it reasonably believed the worker was a contractor to rely on the defence.
What is a back-to-back obligation in a subcontractor agreement?
It means the key requirements in your head contract, like insurance minimums, compliance standards and audit rights, are also imposed on your subcontractor. Without that alignment, you can be held to a standard your subcontractor was never bound by.
What agreements do I need when hiring a contractor or subcontractor?
Use a Contractor Agreement (Individual) for a person and a Contractor Agreement (Company) for a Pty Ltd. If you’re a contractor bringing in help, use a Subcontractor Agreement that mirrors your head contract.
Ready to put your subcontractor agreement in place?
Getting the contractor vs subcontractor setup right doesn’t take a law degree. You need the right agreement signed before the work starts, and a subcontract that actually matches what you promised your client. If you’ve been running on a handshake or an old template, you’re not behind. That’s where most growing businesses start.
Lawpath gives you 550+ lawyer-drafted templates in one place, used by more than 650,000 Australian businesses, with lawyers on hand when your head contract needs a closer look. Start your Subcontractor Agreement today.
