Is a fractional executive an employee or a contractor?

Short answer: a fractional executive can be a genuine contractor, but the agreement’s label doesn’t make them one. Four separate tests apply: the Fair Work Act test for sham contracting, the ATO’s super guarantee test, the personal services income (PSI) rules and your state’s payroll tax contractor provisions. Engaging the executive’s company, for a defined scope, with their own insurance and other clients, passes most of them. In Victoria, a contractor who works for you on 90 days or fewer in a financial year is also outside payroll tax.

This is the question CEOs ask me after the price. It’s a fair one. A fractional executive has a title, a team and a seat at the leadership table, which looks a lot like employment. Getting it wrong can mean back pay, super, payroll tax and penalties.

Here’s how each test works, what it means for a one or two day a week seat, and how I set up my own engagements. It’s general information, not legal or tax advice: check your own arrangement with your lawyer or accountant.

Which rules decide whether a fractional executive is an employee?

There isn’t one test. There are four, run by different regulators, and passing one doesn’t mean you pass the others.

Rule	Who runs it	What it asks	What’s at stake for you
Sham contracting (Fair Work Act)	Fair Work Ombudsman and the courts	Is the relationship, in substance, employment?	Penalties, plus leave, notice and other employee entitlements
Super guarantee	ATO	Is the contract with an individual, mainly for their labour?	Super on the contract value, plus the super guarantee charge if you miss it
Personal services income	ATO	Is the income mainly a reward for one person’s skill, and does their business pass the PSI tests?	Mainly the contractor’s tax position, not yours
Payroll tax contractor provisions	Your state revenue office (in Victoria, the SRO)	Is the contract a “relevant contract”, and does an exclusion apply?	Payroll tax on the payments, if you’re above the threshold

What is sham contracting, and what are the penalties?

Sham contracting is telling a worker they’re an independent contractor when they’re in fact your employee. The Fair Work Ombudsman says it’s illegal to represent a worker as a contractor unless the business reasonably believed they were one. It’s also illegal to dismiss an employee, or threaten to, so you can re-engage them as a contractor for the same work.

The maximum penalties are per contravention:

Who	Maximum penalty per contravention
Individuals	A$21,840
Businesses with fewer than 15 employees	A$109,200
Larger businesses	A$546,000

Source: Fair Work Ombudsman, sham contracting.

The penalty is rarely the largest cost. If a “contractor” turns out to be an employee, you also owe the entitlements an employee would have had.

How do you tell an employee from a contractor since August 2024?

From 26 August 2024, a company (a “constitutionally covered business”, which is usually any Pty Ltd or Ltd) uses the whole of relationship test. It looks at the “real substance, practical reality and true nature” of the relationship: the written contract and how it works in practice. Before then, the start of relationship test looked mainly at what the parties had agreed in the contract.

The Fair Work Ombudsman lists the factors. No single one decides it, and an ABN or an invoice doesn’t make someone a contractor:

Factor	Points to employee	Points to contractor
Control	You direct hours, location and how the work is done	They control their hours, location and methods
Financial risk	No risk: paid whatever happens	Carries the risk of loss, fixes poor work at their own cost, holds their own insurance
Tools and equipment	You supply them	They supply their own
Delegation	Must do the work personally	Can delegate or subcontract
Hours	Standard or set hours	Decides their own

For a senior executive, I think control tells you less than it does for most roles. Senior employees also set their own hours and methods. The factors that carry more weight for a fractional seat are whether the person runs a business of their own, with other clients, their own insurance and their own risk, and whether they’re engaged for a defined scope rather than an open-ended job.

Two more points matter for fractional executives in particular:

• The high income opt-out. A worker who earns more than the contractor high income threshold, A$190,100 from 1 July 2026, can give you a written opt-out notice. The older start of relationship test, based on the written contract, then applies instead. Only the worker can opt out. You can tell them in writing that they may, and they have 21 days to decide. They can withdraw the notice at any time (Fair Work Ombudsman, opting out). It changes only the Fair Work Act test, not super, PSI or payroll tax.
• Contracting with their company. Engaging the executive’s company rather than the person makes an employment finding less likely, but it doesn’t protect you if the substance of the relationship is employment.

Do you have to pay super on a fractional executive?

Usually not, if you contract with their company. The ATO treats a contractor you pay mainly for their labour (more than half the contract’s value) as an employee for super guarantee purposes, even though they’re not an employee for anything else. But it also says that if you contract with a company, trust or partnership, you don’t have to pay super for the person they employ to do the work.

So the structure matters here more than anywhere else. An individual sole trader, paid by the day for their time, is the case to check. The ATO’s employee or contractor decision tool is a good first step.

Is personal services income your problem or theirs?

Mostly theirs. Personal services income is income produced mainly (more than 50%) from one person’s skill or effort, which describes nearly every fractional executive. The PSI rules then decide how the executive, or their company, reports that income and which deductions they can claim.

They escape the rules if their business is a personal services business. To self-assess as one, they need to pass the results test for at least 75% of their PSI (paid for a result, supplying their own tools, fixing mistakes at their own cost), or pass another test and earn less than 80% of their PSI from one client.

PSI doesn’t make you an employer. But if you’re a fractional executive’s only real client, that’s a signal to look harder at the other three tests, because it weakens the case that they run a business of their own.

Does payroll tax apply to a fractional executive in Victoria?

It can. In Victoria, payroll tax is 4.85% of taxable wages above a A$1 million annual threshold (1.2125% for regional employers), from 1 July 2025 (SRO, current rates). If your Australian wages are under the threshold, the rest of this section doesn’t apply to you.

Above it, the contractor provisions treat payments under most service contracts as wages, whether the contractor is a company, trust, partnership or sole trader. Payments are excluded if one of these applies:

• the contractor works for you on 90 days or fewer in a financial year
• the contractor engages others to do the work
• the contract is mainly for materials or equipment, not labour
• the contractor serves a range of clients and you don’t normally need the service for your ongoing business
• you need the services for less than 180 days in a financial year
• the contractor typically provides the service to the general public

The 90-day exclusion is the one that matters most for a fractional seat. The SRO counts any work on a given day as one full day, and the days don’t have to be consecutive. If no exclusion applies, payroll tax applies to every payment, including those in the first 90 days.

Fractional pattern	Days in a financial year (about 46 working weeks)	Under 90 days?
One day a week	About 46, plus any short calls on other days	Yes, with room to spare
One day a week plus regular calls on two other days	Can pass 90	Count carefully
Two days a week	About 92	Usually no
Three days a week	About 138	No

The calls are where people get caught. A 20-minute call on a day that isn’t a scheduled day counts as a day of work. If the seat is really one day a week, keep it that way, or keep a log of the days.

Each state has its own contractor provisions. They’re broadly similar, but check the rules where your business pays wages.

How do you set up a fractional engagement so it stays a contract?

The aim isn’t to dress up a job as a contract. It’s to make sure the agreement describes what really happens, because that’s what all four tests look at. In my experience, these are the points that make the difference:

1. Engage a business, not a person. Contract with the executive’s company or trust, and check its ABN and GST registration.
2. Buy a defined scope. Write down the outcomes, the measures for the first 90 days and the decisions the role owns. How to brief a fractional executive has a free template for that.
3. Agree the days, then keep to them. Write the days a week into the agreement and record the days actually worked, especially in Victoria.
4. Let them carry the risk. They hold their own professional indemnity and public liability insurance, and fix their own mistakes.
5. Don’t put them on the org chart as an employee. No employee contract, no leave, no payslip, and no policies written for staff applied to them as if they were.
6. Check they have other clients. It’s fair to ask. An executive who works only for you, full-time, for years is the profile every test is designed to catch.
7. Review it when the role changes. A seat that grows from one day a week to three, or becomes indefinite, may need a different structure.

This is how I work. I contract through my Australian company under a services agreement, invoice monthly with my ABN on every invoice, and hold professional indemnity and public liability insurance (how I work). A fractional seat is about one day a week, has a three-month minimum, and then runs month to month with 30 days’ notice either way. I usually work with two or three clients at a time, and I log every day I do any work for a client, calls included, so the day count is never a guess.

When should a fractional or interim executive be an employee?

Sometimes the honest answer is employment. If you need someone full-time, in the seat, for an indefinite period, directed by the CEO like any other executive and working for no one else, the arrangement is employment in substance, and a fixed-term or permanent employment contract is the right tool.

That’s most often true of a long interim executive role. Interim work can still be a genuine contract, through the executive’s company and for a defined program, but it sits closer to the line than a fractional seat, so it’s worth checking with your lawyer before you sign. When I stepped in as acting head of digital for a global health and wellness brand, I was engaged through my own company, under a contract rather than on the payroll. Fractional vs interim executive explains when each model fits.

The bottom line

A fractional executive is usually a genuine contractor, because the model is one person running their own business for several clients, a day or two a week each. But the label isn’t the test. Contract with their company, buy a defined scope, keep to the agreed days, let them carry their own risk and insurance, and in Victoria watch the 90-day count.

If you’re weighing up a fractional seat and want to talk through how it would be set up, book a 30-minute call. You can see what a seat involves on the fractional COO, fractional CMO and CRO and fractional Chief AI Officer pages, and what it costs in what a fractional executive costs in Australia.