It’s important for all businesses to have systems in place to determine whether workers should be classified as employees or independent contractors, as tax, super and other government obligations are different depending on whether the working arrangement involves a contract of service (employment) or a contract for service (contracting).
Employees generally have PAYG withholding, super and fringe benefits tax paid by the employer. Contractors are in business on their own account and generally look after their own tax obligations. And just to make things more difficult, under some legislation contractors can be deemed employees.
If businesses get it wrong and fail to meet their obligations, they risk having to pay penalties and charges.
What factors do businesses need to consider?
There are a number of factors which need to be taken into account which help determine whether a worker could be classed as an employee or an independent contractor.
It is important to realise that no single factor can determine if a person is an independent contractor or an employee. To correctly determine whether a worker is an employee or contractor, you need to look at the whole working arrangement.
A worker isn’t automatically a contractor just because they have an ABN or specialist skills or you only need them during busy periods.
Courts will look at the whole relationship between the parties when determining the status of a person’s engagement.
The Fair Work Ombudsman has produced a table of common indicators that may contribute to determining whether a person is an employee or independent contractor:
|Degree of control over how work is performed||Performs work, under the direction and control of their employer, on an ongoing basis.||Has a high level of control in how the work is done.|
|Hours of work||Generally works standard or set hours (note: a casual employee's hours may vary from week to week).||Under agreement, decides what hours to work to complete the specific task.|
|Expectation of work||Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period).||Usually engaged for a specific task.|
|Risk||Bears no financial risk (this is the responsibility of their employer).||Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.|
|Superannuation||Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.||Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).|
|Tools and equipment||Tools and equipment are generally provided by the employer, or a tool allowance is provided.||Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).|
|Tax||Has income tax deducted by their employer.||Pays their own tax and GST to the Australian Taxation Office.|
|Method of payment||Paid regularly (for example, weekly/fortnightly/monthly).||Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.|
|Leave||Entitled to receive paid leave (for example, annual leave, personal/carers' leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees.||Does not receive paid leave.|
A simple way to help tell the difference
The Australian Taxation Office on its website uses the following simple descriptions:
- Employees work in your business and are part of your business.
- Contractors run their own business and provide services to your business.
Why is the distinction important?
Employment relationships are regulated by specific labour protection laws and various awards and workplace agreements. These laws generally provide a higher degree of protection to employees than the general commercial laws that regulate contractor relationships.
This protection includes minimum conditions and standards of employment for employees including minimum entitlements for leave, public holidays, notice of termination and redundancy pay.
Adopt good business processes
Business owners need to keep records to support any decision on whether a worker is an employee or contractor and the factors relied on to make that decision.
Most of the information needed to support the decision can be found in a service contract for independent contractors or an employment contract for employees, which should accurately reflect the actual conditions of the working arrangement.
All contracts should:
- be in writing;
- specify whether it is a contract for services or an employment contract;
- set out the period of engagement and the remuneration;
- include dispute resolution provisions;
- specify if/how the relationship can be terminated.
It is illegal for an employer to misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement or make a knowingly false statement to persuade or influence an employee to become an independent contractor. This is known as “sham contracting” and it is unlawful under the Fair Work Act.
It is also unlawful to dismiss or threaten to dismiss an employee and then engage them as a contractor to perform the same work.
Businesses engaging in sham contracting may be liable for penalties (for a company, currently a maximum of $66,600 per contravention) as well as compensation and possible injunctions to prevent any dismissal.