The Sole Trader’s Hiring Dilemma
There’s a common myth circulating among Australian business owners: “I can’t hire staff because I’m a sole trader.” It’s not only incorrect, it’s potentially holding you back from scaling your business. According to the latest ABS data, a staggering 97.2% of Australian businesses are small enterprises, and many of them operate as sole traders who employ staff.
However, with that flexibility comes a heavy burden of responsibility. A concerning 43% of sole traders admit they underestimate their personal liability when employing others, meaning they risk losing their personal home or assets if an employee lodges a claim and the business can’t cover the damages. Employment lawsuits, unfair dismissal disputes, unpaid super claims, and workplace accidents don’t just impact your business, they can impact your life.
BetterPayroll’s Perspective: Hiring isn’t just a numbers game. It’s not about whether you have one or ten employees; it’s about how safely and legally you manage that workforce. This guide breaks down the overlooked legal and compliance risks sole traders face and how to avoid them with smarter payroll tools and processes.
What Gets Missed: 5 Critical Gaps in Other Guides
| Gap in General Contents | BetterPayroll’s Enhanced Coverage |
| No employee limit mentioned but lacks depth on risk | Unlimited hiring = unlimited liability. Tip: scale responsibly. |
| Superficial tax/STP coverage | 2025 STP Phase 2 updates: Now includes disaggregated income types and contractor reporting. Misclassify an employee as a contractor? The ATO could fine you up to $469,500. |
| Zero state-specific compliance | State-by-state obligations matter. WA has a $1 million payroll tax threshold, QLD enforces strict trade site safety logs, and VIC requires mediation before certain dismissals. |
| Ignores financial viability analysis | Cost calculator: Salary + 24% overhead = true cost. Includes super, leave loading, insurance, and training. Sole traders often underbudget and run into cash flow issues. |
| No transition roadmap for growth | The 5-employee tipping point: At this level, consider incorporating for asset protection. |
Legal Framework: What Sole Traders MUST Know
A. Employee Limits Debunked
Let’s get this straight: there’s no federal law capping how many employees a sole trader can hire. Technically, you can employ one or a hundred. But each new hire increases your exposure to risk, admin load, and financial strain. Here’s why:
- Personal Liability: Unlike company directors who benefit from limited liability, sole traders are personally responsible for legal claims made by employees. That includes unfair dismissal, discrimination, and injury-related lawsuits. One claim could wipe out your savings or home equity
- Financial Pressure: According to BetterPayroll data, 68% of sole traders who employ five or more people experience serious cash flow strain. Payroll tax, superannuation, paid leave, and penalties for mistakes quickly stack up.
- Compliance Complexity: Every employee you hire brings an average of 11 additional compliance conditions, from award interpretations to STP Phase 2 data to fair termination procedures. Ignoring one could land you in court.
B. State-by-State Employer Rules
Australia’s employment regulations vary widely between states, and as a sole trader, you need to be aware of what’s expected in your operating location.
- NSW: Sole traders in construction or electrical trades face strict worksite safety rules. Fines for breaches can hit $500,000, especially if an untrained or unsupervised employee causes harm. Employers must maintain WHS documentation and register for workers’ comp before day one.
- QLD: Any injury on site, no matter how minor, must be reported to WorkCover QLD within eight business days. Failure to do so not only voids your insurance claim but also attracts penalties. Additionally, workers’ comp premiums are significantly higher in the trades sector due to accident risk profiles.
- VIC: Dismissing an employee due to behavioural or performance issues? If there’s even a hint of discrimination (e.g., based on age, disability, gender), mediation is legally required before you proceed. Skip it, and you could face a Fair Work claim, even if you had valid reasons.
C. Contractor vs. Employee: The $469,000 Mistake
The line between contractor and employee used to be drawn based on written contracts. But under the ATO’s 2025 “Whole of Relationship” Test, that’s no longer enough. Even if someone signs a contractor agreement, they may be deemed an employee if they:
- Use your tools or software
- Work regular hours under your control
- Don’t advertise their services to others
- Are paid hourly, not per project
If you get it wrong:
- Individual penalty: Up to $93,900 per sham contract.
- Company penalty: Up to $469,500 per misclassified worker.
- Super backpay: You may be liable for unpaid super (11%), leave, and entitlements for years retroactively.
Step-by-Step Hiring Process for Sole Traders
Hiring your first employee as a sole trader is a big milestone, but it also comes with compliance responsibilities that many small business owners overlook. Below is a structured process every sole trader should follow to stay compliant and avoid costly mistakes.
Step 1: Pre-Hire Compliance Setup
Before onboarding your first staff member, ensure your business is legally prepared.
- PAYG Withholding Registration: You must register with the ATO for Pay As You Go (PAYG) withholding. This system requires you to withhold tax from employee wages and submit it to the ATO. It’s non-negotiable, and failing to do so could result in penalties and interest charges.
- Workers’ Compensation Insurance: This is a legal requirement in all states. If your employee is injured at work and you’re uninsured, you could face fines up to $120,000, depending on the state, and be personally liable for medical and rehabilitation costs. For example, NSW and VIC have strict penalties for uninsured employers, especially in high-risk sectors like trades or hospitality.
- Award Rate Alignment: Ensure you pay at least the minimum wage and entitlements under the relevant Modern Award. Many sole traders accidentally underpay due to Award complexity.
Step 2: Employee Onboarding Essentials
Once you’ve set up compliance foundations, move into onboarding. Proper onboarding isn’t just a best practice, it’s a legal safeguard.
Documentation Trio:
- Fair Work Information Statement (FWIS): Must be provided to all new employees on or before their first day. It outlines their rights under the Fair Work Act.
- Casual Employment Information Statement: If you’re hiring a casual, this is also mandatory. It details their entitlements and conversion rights.
- Signed Employment Contract: A written agreement is vital for both parties. It should include:
- Position title and duties
- Start date and type of employment (e.g., casual, part-time)
- Pay rate and pay frequency
- Leave entitlements
- Notice and termination clauses
Step 3: Payroll & Tax Management
Hiring is just the start, payroll and tax compliance is an ongoing responsibility.
- STP Phase 2 Compliance: You must report each payroll event in real-time to the ATO. Under Phase 2, you need to break down earnings into components (base pay, allowances, bonuses, etc.) and include employment basis, TFNs, and termination reasons. BetterPayroll does this automatically, no manual input needed.
- Superannuation Contributions: You’re legally required to pay 11% super on an employee’s ordinary time earnings. Contributions must be made quarterly through a Super Clearing House. Late payments attract penalties and interest.
Financial Implications: Beyond Salaries
Hiring is more expensive than many sole traders expect. You’re not just paying a salary, you’re covering compliance, insurance, and entitlements.
True Annual Cost of a $75,000 Employee
| Cost Component | Annual Amount |
| Base Salary | $75,000 |
| Superannuation (11%) | $8,250 |
| Workers’ Comp Insurance | $1,200–$4,500 |
| Payroll Tax (NSW > $1.2m) | Variable |
| Recruitment & Training | $3,000+ |
| Total Estimated Cost | $87,450+ |
Cash Flow Protection Strategies:
- Invoice Financing: If client payments are delayed but payroll is due, short-term invoice finance can bridge the gap.
- Leave Buffers: Allocate 8% of each employee’s pay into a reserve for annual and sick leave. This helps absorb sudden costs when staff take extended time off.
Scaling Safely: When to Stop Being a Sole Trader
Hiring your first employee is manageable, but what happens when you hit 5? Or your revenue hits $200,000+? This is where risk escalates.
Red Flags That It’s Time to Incorporate:
- 5+ Employees: More staff = more lawsuits, insurance risk, and admin.
- $200,000+ in Revenue: At this point, payroll tax and cash flow pressure increase.
- High-Risk Operations: If you’re in construction, healthcare, or manufacturing, your personal liability skyrockets.
Transition Roadmap:
- Register a Company: Apply through ASIC and obtain an ACN.
- Transfer Business Assets: Shift ownership of IP, leases, and contracts to the company
Conclusion: Hire Confidently, Scale Smartly
Being a sole trader doesn’t mean staying small, but it does mean staying sharp. The moment you hire your first employee, you’re legally exposed. One misstep, a late super payment, a misclassified contractor, or an invalid dismissal can cost you tens of thousands.
BetterPayroll’s Solution: All-in-one payroll and compliance built for sole traders. Whether you’re hiring your first or your fifth team member, we help you pay people right, stay audit-ready, and grow with peace of mind.
👉 Start a Free Trial – Generate STP-compliant payslips, automate super, and dodge $469k fines in 10 minutes.
Frequently Asked Questions (FAQs)
Q: Can a sole trader fire an employee?
Yes, but only with a proper process. You must have a valid reason (e.g., misconduct, performance) and follow procedural fairness. Skipping these steps could lead to unfair dismissal claims, up to $83,750 in compensation.
Q: Do sole traders pay themselves super?
No, there’s no legal obligation. But if you want retirement savings, voluntary contributions are encouraged. That said, you must pay 11% super to eligible employees and some contractors deemed employees under ATO rules.
Q: What insurance does a sole trader with employees need?
- Workers’ Comp Insurance: Mandatory and state-specific.
- Public Liability Insurance: Covers injury to others/property damage, $5 M+ is standard.
Professional Indemnity: Must-have for consultants, creatives, or service-based professions.