Contractor or employee?

Contractor or employee?
We see this issue a lot with our clients, and it is important to have detailed knowledge and understanding about the relationship of your employees and contractors when running a business.

Just because an agreement states that a worker is an independent contractor, this does not mean that they are a contractor for tax and superannuation purposes, new guidance from the ATO warns.

Where there is a written contract, the rights and obligations of the contract need to support that an independent contracting relationship exists. The fact that a contractor has an ABN does not necessarily mean that they have genuinely been engaged as a contractor. 

The ATO says that “at its core, the distinction between an employee and an independent contractor is that:

• an employee serves in the business of an employer, performing their work as a part of that business.
• an independent contractor provides services to a principal’s business, but the contractor does so in furthering their own business enterprise; they carry out the work as principal of their own business, not part of another.”

There are many circumstances that will determine an employee/contractor relationship and there is not one size fits all.

However, here are some fundamental indicators:

• the amount of control over how work is performed – do you give your contractor instructions on how to perform the role?
• financial responsibility and risk – does your contractor have insurance and carry the risk for making a profit or loss on each job? Are they liable for poor work?
• who supplies the tools and equipment – does your contractor provide all their own tools to get the job done? This includes their own laptop/ computer or cleaning supplies?
• ability to delegate or subcontract work – can your contractor delegate work to someone else or another business to get the job done?
• hours of work - do you have an agreement set by both parties of when the contractor will perform the task based on how long it will take them and when they choose to get it done?
• expectation of work continuing – does your contractor continue to work for you, even when the original task was completed? For example, are they engaged by you for 2 days per week indefinitely?

Be aware of Sham Contracting – this is illegal!

If you engage a worker and tell or represent to them they are engaged as an independent contractor to do the job and you knew (or should have known) that the worker is an employee, then this can be considered a sham. Also, you cannot dismiss an employee and engage them as an ‘independent contractor’ to continue performing the same type of work.

Resting on your laurels about the relationship with your contractors may result in you having to fork out penalties, additional tax, back pay of superannuation and other costs to achieve your compliance requirements.

Contracts over time

The ATO points out that a contracting agreement at the start of a relationship may not continue to be one over time. For example, if the project the contractor was engaged to complete has finished, but the worker continues working for the company then the classification needs to be revisited.

What happens if there is no contract?

If no contract exists, then it’s important to look at the form and substance of the relationship to come to a reasonable position about whether an employment or contractor relationship exists.

Need assistance?

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