When determining whether a worker is a contractor or an employee, the courts say “… the distinction between an employee and an independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer’s business, and a person who carries on a trade or business of his own.”
What to do if you engage contractors
If you engage contractors, it is essential to get the facts of the relationship right. Business owners need to take a proactive approach to reviewing arrangements to ensure that the business is not exposed to material liabilities. Key factors include:
- Whether the work involves a particular profession or skill set.
- The level of control the contractor has over how the contract is executed.
- The ability of the contractor to delegate work to another person.
- Whether the contractor supplies his own tools or equipment.
- Whether the contractor has his own place of business.
- The contractor’s ability to generate goodwill or saleable assets during the course of the contract.
- How the contractor is paid (for hours worked or a result).
- The level of risk the contractor bears.
- Whether the contractor is independent or in reality, simply ‘part and parcel’ of the organisation they contract to.
- A contractor working through a company can be a factor, but all factors must be looked at.
No single factor is determinative; it is the weight of evidence, on balance, across all of the factors.
A bunch of contractor myths:
- The subby has an ABN so it’s OK – myth.
- Everyone in my industry does it this way – myth.
- As long as the subby does at least 20% of their work for another business it ok – myth.
- We have always engaged contractors as subbys and we don’t need to change now – myth.
- The subby has a business card and a registered business name – myth.
- If I do have a proper contractor, that also rules out super – myth (some contractors attract super).
- I only engage a subby for specialised skills, qualifications or trades so they are contractors – myth.
- The worker wants to be engaged as a contractor so we can treat them as a contractor – myth.
- We signed a contractor agreement so they are a contractor – myth.
The implications of misclassifying a worker
The implications of misclassifying a worker go well beyond industrial relations. If a business misclassifies an employee, it impacts on superannuation guarantee (SG), PAYG withholding, workers compensation, and payroll tax. These entitlements will often need to be met even if the misclassification was a genuine mistake.
Getting it wrong can be a very costly exercise particularly if the error is evident over a number of years and if you are going to take one thing from this article it should be this:
If you are a business owner engaging others, the onus is on you to get it right. Even if you engage a contractor and he tells you he is running his own business or signs a sub-contractor agreement or whatever – if the ATO decide he is an employee – it’s you who pay the penalties and the subby actually comes off better (for example he ends up with superannuation being owed to him by you on top of what you already paid).
Further for super guarantee obligations, there is no real time limit on the recovery of outstanding obligations. However, the ATO will generally only go back 5 years unless the individual employee can prove an entitlement beyond this point. Remember that employers that fail to make their superannuation guarantee payments on time don’t just pay the outstanding superannuation but are subject to the SG charge (SGC) and lodge a Superannuation Guarantee Statement. SGC is made up of:
- The employee’s superannuation guarantee shortfall amount;
- Interest of 10% per annum; and
- An administration fee of $20 for each employee with a shortfall per quarter.
Unlike normal superannuation guarantee contributions, SGC amounts are not deductible to the employer, even when the liability has been satisfied.