By All Accounts

Warning: Employee or contractor?

By Jonathan Hanaghan,

Jonathan Grant Accountants

Do you engage in the services of independent contractors? Have you given thought to the possibility that they could be employees? Getting it wrong can land you in big trouble!

Following the GFC, Australia has experienced an incredible surge in the amount of contract, temporary and freelance work - dubbed ‘the gig economy’. The underlying force behind an increase in contract related work rests on the grounds of higher flexibility, and lower costs associated with outsourcing work to a third party. The difference between an employee and an independent contractor and an employee is not defined by a fine line. The relationship between yourself and your independent contractor is called a contract for service. On the other hand, a contract of service is the relationship set between yourself and your employee. This is certainly a subtle difference but should not be considered lightly. To determine whether your worker is performing a contract for service (contractor) or a contract of service (employee), the court system will analyse several factors, which is known as the multi-factor test:

Ability of the worker to subcontract/delegate

• An employee can’t pay someone else to do their job, but a contractor can. the time worked, per item, activity, or on a commission basis. Contractors are paid to achieve a specific result.

Equipment, tools, and other assets provided by the worker or provided to the worker

• An employee is mostly provided with tools and equipment by their employer. Contractors mostly provide their own tools and equipment.

Commercial risks of worker

• Businesses are responsible for their employees’ work and so employees do not take on commercial risk. Contractors will be personally liable to rectify any defects.

Control over the work

• A business has full discretion over what work needs to be completed by their employee and how it is performed. Contractors can decide how their work is done provided it is within the terms of the contract.

Independence of worker

• Employees form part of the business and therefore are not independent. • Contractors operate their own business independently – they can accept or refuse additional work.

Other important factors to consider is the exclusivity of the worker and if the worker advertises themselves ‘to the world at large’. Exclusivity asks whether the worker is hired by numerous businesses or must remain exclusive to their employer. Advertising ‘to the world at large’ would likely mean that the contractor has a business name and logo in place, they have a work uniform with their own logo, and they have a storage shed or office that they can operate from. For example, in Rabba v OekeGuy Pty Ltd T/A PeleGuy [2013] FWC 70, the worker was a salesperson who was required to sell products to convenience stores and petrol stations. The features that supported the salesperson as an employee were that he worked exclusively under their employer, was unable to engage others to perform his work, was subject to the supervision of the employer, and selling goods was a vital part of the business of the employer. These facts were weighed up against the fact that the worker submitted invoices, paid for the cost of their motor vehicle fuel, was not subject to PAYG tax, would determine his own hours, and was paid by commission on sales. Perhaps a normal person would be led to believe the worker is a contractor as employees do not invoice their employer and do not determine their own hours. However, the inability of the worker to subcontract, and the fact that he was not conducting his own business when he performed the work gave the court no option but to conclude that the worker was an employee.

Avoid the myths

Myth: If a worker has an ABN they’re a contractor. Fact: The existence of an ABN does not confirm that a worker is a contractor. An employer may force an employee to obtain an ABN to make them look like a contractor and hence mitigating super and tax obligations. This is known as sham contracting. Breaching the sham contracting provisions under the Fair Work Act 2009 will land severe penalties and contraventions. Myth: If a worker is a contractor for one job, they will be a contractor for all jobs. Fact: The working arrangement and specific terms and conditions will determine whether a worker is an employee or contractor for each job. A worker could be an employee for one job and a contractor for the next job. It is paramount to make an ongoing effort to ensure there are no differences between your worker’s contract and their actual working conditions. If you hired a contractor last quarter, and suddenly their job role has turned into an employee, you must immediately start withholding PAYG tax on their behalf, pay the super guarantee minimum, and obtain work cover. Myth: If a worker submits an invoice for their work, they’re a contractor. Fact: The existence of an invoice for completed work does not confirm a worker a contractor. You must examine the working conditions of the worker – many court cases are not decided over whether the worker has an ABN, if there was a contract in place, or if the worker submitted an invoice, they come down to the factors mentioned before (multi-factor test) such as the exclusivity of the worker,

Do I have to pay my contractor’s super?

Even after you have confirmed that you have hired a contractor you may still be liable for super contributions on their behalf. The Superannuation Guarantee (Administration) Act 1992 (Cth) states that a contractor is entitled to superannuation contributions if they work under a contract that is “wholly or principally for the labour of the person.” Employers will have to pay the 10.5 percent Super Guarantee minimum. If you incorrectly classify an individual as an employee or contractor, you may be liable for: • superannuation charges; • additional payroll tax; • penalties and interest; • unpaid annual and long service leave; and • compensation for unfair dismissal or other remedies.

Since the induction of taxable payments annual reports (TPARs) to the building and construction industry in 2014, the ATO has continued to strengthen its resources in order to close the gap of non-compliance. Recently, the ATO has broadened this scope to several other industries and their businesses. Businesses providing cleaning services must now lodge a TPAR. Clearly, this has implications for our businesses in management rights. If you have a management rights business and 10 percent or more of your income is for cleaning services, you must lodge a TPAR. Although, if you fall under this threshold, it is still a wise decision to lodge a TPAR nil report to avoid questioning from the ATO later down the track.

If you are still unsure if your worker is a contractor or an employee, please seek professional guidance from your accountant.