Employee vs Contractor: Cost Analysis

Why the obvious comparison misleads

Put an employee's salary next to a contractor's day rate and the contractor looks expensive. Load up the employee's true cost and the gap narrows — sometimes it disappears, sometimes it reverses. Worse, the comparison isn't purely financial: whether someone is genuinely a contractor is a legal question, and getting it wrong carries real consequences. This page walks through the full cost stack on each side, and the classification risk that sits over the top of both.

The true cost of an employee

An employee's cost is their remuneration plus everything the employment relationship obliges you to carry:

• Wages or salary — at or above your award's current rates (check the Fair Work Ombudsman's pay tools for what applies right now).
• Superannuation guarantee — at the ATO's current rate, paid on the current schedule (with payday super changing the cadence — confirm the current rules).
• Paid leave — annual leave, personal leave, public holidays and long service leave accruing in the background; you pay for weeks nobody works.
• Workers' compensation insurance — premiums set by your state scheme and industry classification.
• Payroll tax — if your total wages exceed your state or territory's current threshold.
• Overheads — equipment, software licences, workspace, training, and the recruitment cost you'll amortise over their tenure.
• Management time — onboarding, supervision, performance conversations. Rarely costed, always real.

A useful exercise: list every one of these for the role you're considering and build the fully loaded annual figure from your own numbers. It is reliably higher than the salary — the point is to know by how much in your case, not to rely on a rule of thumb.

The true cost of a contractor

• The rate itself — which prices in the contractor's own super, leave, insurance, equipment and downtime. That's why it looks high; it's carrying costs you'd otherwise carry.
• Super you may still owe. Contractors engaged mainly for their labour can be deemed employees for superannuation guarantee purposes even with a valid ABN. The ATO's guidance on this catches many businesses by surprise.
• Payroll tax exposure. Most states have relevant-contract provisions that pull some contractor payments into payroll tax. Check your state revenue office's current rules.
• Engagement overhead — contracts, insurance certificates, renegotiation, and re-briefing when you switch providers.
• Knowledge walking out the door — a contractor's experience with your systems leaves when the engagement ends unless you deliberately capture it. (This is a version of the same problem as founder dependency: capability living in a person rather than the business.)

The risk that outweighs the maths: classification

You don't get to choose someone's status by calling them a contractor. Whether a worker is an employee or contractor turns on the whole relationship — control over how work is done, ability to delegate, who bears commercial risk, who provides tools, whether they're genuinely running their own business. Misclassification (sham contracting) can trigger back-pay of entitlements, superannuation charges and penalties. Both the Fair Work Ombudsman and the ATO publish current guidance and decision tools — run any borderline engagement through them, and take specific advice from your accountant or an employment lawyer before you rely on the label. Nothing here substitutes for that.

How to decide, beyond the spreadsheet

• Choose an employee when the work is ongoing and core, you need control over how it's done, and you're building capability you want to keep.
• Choose a contractor when the need is genuinely project-based or specialist, the person runs a real independent business, and the arrangement would survive the classification tests on its substance.
• Don't choose contractor status to save money on an employee-shaped role. The saving is usually smaller than it looks, and the downside if challenged is much larger.

For how hiring decisions fit into the broader people function, see people.