Hiring Your First Employee: The Compliance Steps Small Business Owners Skip (and Why They Regret It)

I have had some version of this conversation more times than I can count.

A business owner - usually somewhere between 6 and 24 months into running their first business with staff - calls or messages in a state of controlled panic. They have just discovered they have been underpaying their employee for the past year. Or they have terminated someone without following the correct process and received an unfair dismissal application. Or they have been paying their worker as a contractor and just learned, in an ATO audit, that the relationship is actually employment.

In every case, the problem did not start when the crisis arrived. It started on the day they hired - when the compliance steps they did not know about were simply never completed.

The Fair Work Ombudsman is running a free webinar on 23 June 2026 specifically on hiring your first employee. That is a useful starting point. But this article covers what you need to know before then - and before your new employee walks through the door.

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Before you hire: The question that determines everything

Is this person an employee or a contractor?

Every legal obligation in this guide attaches to the employer-employee relationship. Get the classification wrong and you can owe years of back-paid superannuation, leave entitlements, payroll tax, workers compensation premiums - and since 1 January 2025, potentially criminal liability under the sham contracting provisions of the Fair Work Act.

For the purposes of this guide, we proceed on the basis that you are hiring an employee.

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The compliance steps - before day one

Step 1: Register for PAYG Withholding with the ATO

As an employer, you are required to withhold tax from your employee's wages and remit it to the ATO. This requires registration for Pay As You Go (PAYG) Withholding. If you do not already have an Australian Business Number (ABN), register for one at the same time.

This is an ATO obligation, not a Fair Work obligation - but it is the first thing you need in place before you can pay wages legally.

Step 2: Get Workers Compensation Insurance

Workers compensation insurance is mandatory in every Australian state and territory before an employee starts work. The insurer varies by state:

• NSW: icare (icare.nsw.gov.au)
• Victoria: WorkSafe Victoria (worksafe.vic.gov.au)
• Queensland: WorkCover Queensland (workcoverqld.com.au)
• WA: WorkCover WA (workcover.wa.gov.au)
• SA: ReturnToWorkSA (rtwsa.com)
• Tasmania: WorkSafe Tasmania (worksafe.tas.gov.au)

You must have a valid workers compensation policy in place on your employee's first day. There is no grace period. Operating without it exposes you to significant fines and leaves you personally liable for any workplace injury costs.

Step 3: Identify the correct Modern Award

Most Australian employees are covered by a modern award - an industry or occupation-specific instrument that sets minimum pay rates, penalty rates, overtime, allowances, and leave loading. There are 121 modern awards in the national system.

The award also determines:

• Minimum classification level (what level does this role sit at?)
• Penalty rates for weekend, evening, and public holiday work
• Overtime provisions
• Leave loading (17.5% under most awards)
• Casual loading (25%)
• Break entitlements

Get the award identification right at the start. It is the foundation for every downstream pay calculation.

Step 4: Determine employment type - full-time, part-time, or casual

The employment type determines the employee's entitlements under the National Employment Standards and the applicable award. Key differences:

Full-time: 38 ordinary hours per week. 4 weeks annual leave, 10 days personal/carer's leave, community service leave, long service leave, parental leave (if eligible), and notice of termination entitlements.

Part-time: Regular and systematic hours less than 38 per week. Same entitlements as full-time, pro-rated for hours.

Casual: No guaranteed hours. Entitled to a 25% casual loading in lieu of most leave entitlements. From 26 August 2024, the casual definition uses a new multi-factorial objective test - a worker who starts as casual but becomes genuinely regular and ongoing may no longer meet the definition. From 26 February 2025, casual employees have an 'employee choice pathway' to request a change to permanent employment after 6 months.

Step 5: Set up payroll - Single Touch Payroll is mandatory

Every Australian employer must report payroll information to the ATO using Single Touch Payroll (STP) Phase 2. This means using compatible payroll software - Xero, MYOB, KeyPay, Employment Hero, or equivalent - that automatically reports wages, PAYG withholding, and superannuation to the ATO on every pay run.

Manual payroll is not compliant with STP requirements. Set up your payroll software before your employee's first day.

From 1 July 2026, your payroll software must also support Payday Super - the requirement to pay superannuation contributions on the same day as wages. Confirm your chosen platform is payday-super-ready.

Step 6: Set up Superannuation

You must pay superannuation guarantee (SG) contributions of 12% of qualifying earnings for every eligible employee. From 1 July 2026, these contributions must be paid on the same day as wages - not quarterly.

Before your employee starts:

• Provide a Superannuation Standard Choice Form so they can nominate their fund
• Set up your payroll software with the correct super fund details
• Confirm your clearing house arrangement can process payday super from 1 July 2026

Step 7: Provide the Fair Work Information Statement

You are legally required to provide every new employee with the Fair Work Information Statement before or as soon as practicable after they start work. This is a document produced by the Fair Work Ombudsman that sets out the employee's basic rights and entitlements under the Fair Work Act.

Failure to provide it is a breach of the Fair Work Act. It can be provided by email as a PDF. Download the current version from fairwork.gov.au each time - the Statement is updated periodically.

If you are hiring a casual employee, you must also provide the Casual Employment Information Statement at commencement, again after 6 months of employment, and annually after that.

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The five compliance mistakes small business owners make - and the cost of each

Mistake 1: Misclassifying employees as contractors

The cost: Years of back-paid super, leave entitlements, PAYG withholding shortfalls, and potentially criminal sham contracting penalties of up to $495,000 for a corporation. The ATO and Fair Work Ombudsman run joint audit programs specifically targeting contractor misclassification.

Mistake 2: Paying the National Minimum Wage to an award-covered employee

The cost: The difference between what was paid and what should have been paid - plus interest and penalties. Since January 2025, this is potentially in criminal liability territory if the underpayment is found to be intentional. For an employee on a retail or hospitality award, the underpayment can accumulate to thousands of dollars per year.

Mistake 3: Not keeping employment records

The cost: If an employee claims underpayment and you cannot produce payroll records, the Fair Work Act reverses the burden of proof - the employee's claim is presumed correct. Records must be kept for seven years and must include wages paid, hours worked, leave accruals and balances, and superannuation contributions.

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In the Fair Work system, the employer who cannot produce records cannot win a payroll dispute. Seven years of records is not optional - it is your only defence.

Mistake 4: Not having a written employment contract

A written employment contract is not legally required under the Fair Work Act - but in practice, the absence of one creates significant risk at the end of the employment relationship. Without a written contract, disputes about notice periods, termination conditions, post-employment obligations, and the scope of the role are resolved by reference to the award and general law - which may not align with what either party understood.

At minimum, a contract for your first employee should address: employment type (full-time, part-time, or casual), hours of work, pay rate and classification, notice period, whether the role is covered by an award or enterprise agreement, and confidentiality obligations.

Mistake 5: Not understanding the small business fair dismissal difference

If your business has fewer than 15 employees at the time of dismissal, you are a small business employer under the Fair Work Act. You are covered by the Small Business Fair Dismissal Code - a separate code that provides a streamlined process for dismissal but carries a specific compliance requirement: if you follow the Code when dismissing an employee, the FWC must dismiss any unfair dismissal application. This is a significant protection that many small business owners do not know exists.

The Code requires a valid reason for dismissal and, for performance-related dismissals, prior warnings that performance was not meeting expectations. Terminating someone without a prior warning for performance reasons - unless the conduct is serious misconduct - will not satisfy the Code.

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The compliance calendar for your first year

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When to get HR help

The Fair Work Ombudsman's free Small Business Helpline (13 13 94) provides confidential compliance advice. For most straightforward compliance questions - which award applies, what the minimum pay rate is, how to handle a specific leave request - the FWO helpline is the right first call.

For anything involving termination, a formal complaint, a workplace investigation, or a situation where legal liability is in play, the helpline is not a substitute for professional advice. A Flex HR engagement can provide a structured compliance review, employment contract templates, and advisory support for the situations where "call the FWO helpline" is not the right answer.

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Key Takeaways

1. Contractor vs employee classification is the foundational question. The new test (from 26 August 2024) looks at the practical reality, not just the contract. Get this wrong and the cost compounds over years.
2. Workers compensation insurance is mandatory before day one. No grace period. No exceptions.
3. The National Minimum Wage is rarely the applicable rate. Most roles are covered by a modern award with higher minimums. Use the FWC's award finder.
4. STP Phase 2 reporting via payroll software is mandatory. Manual payroll does not comply.
5. Provide the Fair Work Information Statement. Every new employee. Before or on day one.
6. From 1 July 2026, super is paid on every payday - not quarterly. Confirm your payroll software is ready.
7. Keep employment records for 7 years. Without records, the burden of proof in a payroll dispute shifts to you.
8. The Small Business Fair Dismissal Code is a protection that small employers often do not know exists. Learn it before you need it.

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Sources

1. [1] Fair Work Ombudsman (2026). Hiring Employees - Small Business. Webinar: 'Hiring your first employee: A practical webinar for small business owners', 23 June 2026. smallbusiness.fairwork.gov.au/hiring-employees
2. [2] ScaleSuite (2026). Hiring Your First Employee in Australia: The Complete Employer Compliance Guide. Sham contracting penalty $495,000; STP Phase 2; contractor test. scalesuite.com.au
3. [3] PrepMyBook (2026). Hiring Your First Employee: Complete Checklist 2026. FWIS legal obligation; workers comp by state; STP payroll requirements. prepmybook.com
4. [4] HR Coach (2026). HR Compliance Checklist 2026: Ensuring Your SME Meets Fair Work Obligations. 7-year record-keeping; payslip within 1 business day; NES compliance. hrcoach.com.au
5. [5] Fair Work Act 2009 (Cth) ss.15AA (employee definition - real substance test from 26 August 2024); s.536 (FWIS obligation); s.536B (Casual Employment Information Statement); Part 3A-1 (criminal wage theft from 1 January 2025); Small Business Fair Dismissal Code.
6. [6] FairWork Mate (2026). Small Business Fair Work Guide 2026. Small Business Fair Dismissal Code; casual conversion; common mistakes. fairworkmate.com.au
7. [7] Fair Work Ombudsman (2026). Payday Super: New Rules Starting 1 July 2026. Super paid on payday, contributions reach fund within 7 business days. fairwork.gov.au
8. [8] Ease to Compliance (2025). Australia Employment Regulations 2026: Complete Guide. Right to disconnect extension to small business 26 August 2025; casual conversion employee choice pathway from 26 February 2025. easetocompliance.com