Employee or Contractor? A Church's Guide to Getting It Right

Churches pay a wonderfully varied group of people. A worship leader who plays most Sundays, a guest speaker who visits twice a year, a bookkeeper who works from home, a cleaner, a childcare worker, a pastor on a stipend. The temptation is to treat the casual and occasional ones as contractors and move on. In Australia, that instinct can quietly create real liability, and the rules changed recently in ways many Church leaders have not caught up with.

Why the distinction matters so much

Whether someone is an employee or a contractor changes almost everything about how you pay them: PAYG withholding, superannuation, leave entitlements, workers compensation, and how they are reported to the ATO. Treating an employee as a contractor, even by honest mistake, is known as sham contracting, and it is unlawful. The consequences can include repaying entitlements, ATO penalties, and workers who turn out not to have been insured.

The rules changed in August 2024

From 26 August 2024, a new definition of employment applies under the Fair Work Act. Rather than reading the written contract as the final word, the law now looks at what it calls the real substance, practical reality and true nature of the relationship. This is a return to a multifactorial approach, weighing how the arrangement actually works in practice, not just what the paperwork says.

There is a wrinkle worth knowing. This Fair Work test applies mainly to businesses that are constitutional corporations, typically those with Pty Ltd or Ltd in their name. For tax purposes, the ATO continues to treat a genuine, comprehensive written contract as the primary guide. In other words, the same worker can be assessed slightly differently depending on which law is in view, which is exactly why good documentation and good practice need to line up.

The factors that decide it

No single factor settles the question. You weigh the whole picture. The signs that point towards an employee, rather than a contractor, include:

• The Church controls how, when and where the work is done, rather than just the result.

• The person works within your organisation rather than running their own business.

• The Church supplies the tools, equipment and space.

• The person cannot delegate or subcontract the work to someone else.

• The person carries little or no financial risk and does not stand to make a profit or loss.

A genuine contractor tends to run their own enterprise, invoice with an ABN, use their own tools, work for others, and bear their own commercial risk. A regular worship leader who turns up every week, is told what to play and how, and uses the Church's gear looks a lot more like an employee than a business, whatever the arrangement is called.

Do not forget superannuation

Even a genuine contractor can be owed superannuation. If you engage someone under a contract that is wholly or principally for their labour, the Church may have a super guarantee obligation to them regardless of the label on the arrangement. This one catches Churches out often, so it is worth checking for every regular payee.

The Church-specific twist: ministers and religious practitioners

This is the part general guides miss entirely. Under ordinary legislation, many ministers and pastors are not common-law employees at all. They may be office-holders, or people pursuing a vocation, rather than staff in the usual sense. Yet tax law steps in and deems religious practitioners to be employees for PAYG withholding, fringe benefits tax, GST and ABN purposes, regardless of their status at common law.

In practice, that means a Church paying a stipend generally must register for PAYG withholding, withhold tax from the minister's stipend, and report it through Single Touch Payroll, just as it would for an employee. The idea that a pastor can simply be paid gross pay because they are a minister is one of the most common and costly misunderstandings in Church finance.

Guest speakers, locums and pulpit supply

Short one-off engagements have their own rules. Where a Church engages a visiting religious practitioner for only a day or two in a quarter, withholding may not be required, and the ATO has in some cases varied withholding on genuine locum payments to nil. But these are specific carve-outs, not a general licence to pay visiting speakers without paperwork. Each situation needs to be checked on its facts.

And volunteers

Genuine volunteers are generally not subject to PAYG withholding. The exception to watch is where you pay someone who is really carrying on a business, such as a tradesperson helping out, more than $75 and they do not quote an ABN. In that case withholding can apply.

A simple discipline for Church leaders

Before you pay anyone regularly, ask three questions. Is this person running their own business, or working within ours? Have we documented the arrangement honestly, and does the paperwork match reality? And if they are a minister, are we withholding and reporting correctly? Resisting the shortcut of no paperwork because they are a minister protects both the Church and the person being paid.

Payroll for Churches, including the special treatment of ministers and religious practitioners, is one of the areas we handle end to end for the organisations we partner with. If your setup could use a second set of eyes, reach out and we will help you get it right.