Consultant or Employee? The Misclassification Test That Costs Both Sides

Why the label does not settle it

A document headed consultancy agreement, describing the parties as independent contractors and stating that nothing creates an employment relationship, is evidence of intention. It is not conclusive, because classification looks at what the relationship actually is.

The question that does most of the work is control. An independent contractor is generally engaged to deliver a result and decides how to achieve it. An employee is subject to direction about how the work is done, not only what is to be produced. Where a consultancy agreement sits over a relationship with daily direction, fixed hours and integration into the team, the label is doing very little.

The indicia

• Control over the manner of work, not only the outcome.
• Fixed working hours and a requirement to be available during them.
• Exclusivity, or a practical inability to take other clients.
• Work performed at the company premises using company equipment.
• Integration into the team, including reporting lines, appraisals and internal systems.
• Payment structured as a regular monthly amount rather than against invoices for deliverables.
• Duration: a multi-year engagement with no defined project scope looks different from a fixed brief.

What the Labour Codes changed

The four Labour Codes, in force since 21 November 2025, introduced formal statutory categories including employee, worker, gig worker, platform worker and inter-state migrant worker. That framework gives classification questions a clearer structure than the previous patchwork of definitions across separate Acts.

For companies engaging contractors at scale, particularly in aggregator and platform models, this is a live area rather than a theoretical one. Some states have also enacted gig worker welfare legislation of their own, which adds a further layer depending on where you operate.

Who carries the exposure

The practical exposure sits mainly with the engaging company: statutory contributions, benefits and obligations that would have applied to an employment relationship, together with the tax consequences of having treated payments as consultancy fees.

The freelancer is not unaffected. Their own tax treatment, deductions claimed as a business, and the basis on which they have been invoicing all rest on the characterisation. Where an engagement is genuinely employment in substance, both sides have been operating on an assumption that may not hold.

Making the paperwork match reality

If the engagement is genuinely independent, the contract should reflect that: deliverables rather than hours, your own equipment and location, freedom to take other clients, invoicing against milestones, and no integration into internal appraisal or reporting structures.

If it is not genuinely independent, the honest response is to structure it as employment rather than to draft harder. A consultancy agreement over an employment relationship does not create independence; it creates a document that will not survive examination. Where the position is genuinely borderline, that is worth advice rather than a template.