Contractors vs employees: keeping up with Australia’s employment, tax and workplace laws, can be tricky business. And with an exploding number of organisations hiring contractors – instead of employees – many run the risk of breaching employment legislation and coming unstuck with the tax department.
So for example, if you’ve got long-term contractors in your business, who the ATO may instead classify as employees, then you may end up in hot water.
And that’s not good for anyone…..
Today, the Australian Taxation Office (ATO) and the Fair Work Ombudsman (FWO) are taking increasingly greater interest in this issue – so it’s a good idea to check whether your existing arrangements with the contractors in your business, are compliant.
So….to work out if you’re toeing the line of employee and ATO legislation, we’ve done the legwork for you: this employee compliance checklist will keep your business in the ATO’s good books.
1 Does The Worker Have a Registered Business And An ABN?
It helps if they do. If not, it’s going to be harder for you as an employer, to get the all-clear and have your Contractors deemed Contractors.
However, even if they do have both, it doesn’t mean your responsibilities as an employer are complete….read on.
2 Does the Contractor Have Control Over How Their Work Is Delivered?
An employee of your organisation works according to your direction as their employer, and their job description, issued to them by you.
In contrast, if the worker in your business has a high level of autonomy and control over how their work is done, they would likely be classified as contractor.
Engaging independent contractors means your focus as the ‘payer’ is purely on the outcome. HOW and WHEN they deliver it, isn’t your responsibility
Do you brief the contractors in your business on additional work within their skills & ‘job function’? This is a crucial contractor vs employee question.
If additional work OUTSIDE of the agreed contract is allocated to your contractor, this could result in the contractor being deemed an employee. So….be very clear and transparent in your paperwork and your agreement with the contractor as to the scope of work, and limitations of your expectations of them.
Also keep in mind – if the contractor believes they’re unable to reject additional work issued by you, they’ll be considered an employee. Also, in the agreement with the contractor, remember that they can determine the hours they believe are required to achieve the desired result from their work.
3 Who Supplies the Equipment For The Contractor to Deliver Their Work?
The contractors in your business are responsible for providing their own tools and equipment when working for you. Alternatively, you will typically provide an employee with the required tools and equipment they need to do their job (or instead, provide them with an allowance for the same).
If the contractor uses their own equipment – like a laptop, mobile phone and data storage – to achieve the required results, then you’re all good. BUT…. if you stipulate that the contractor must use company equipment, this won’t work in your favour. This is a standard contractor vs employee differentiation.
4 How is the Contractor Paid?
While an employee is paid on the regular company pay cycle (be that weekly, fortnightly, or monthly) an independent contractor will have an ABN, and will either submit an invoice for the work they complete, or be paid at the end of the contract or project.
If you’re paying them on a regular basis, like a wage, they’re not a Contractor. Instead, the Contractor needs to issue you with an invoice for their work milestones, for you to remit as agreed
5 Can your contractors delegate work?
If the contractor is able to delegate work to other parties – as in, third party sub-contractors – they’ll be in a good position to be deemed a Contractor.
6 Who takes Care of Tax & Super?
Another critical contractor vs employee question relates to taxation and superannuation.
Employees in your business are entitled to receive superannuation contributions paid into their nominated superannuation fund by you. Contractors on the other hand, are responsible for paying their own superannuation.
So if you’re deducting tax from the worker’s remittance, and you’re paying their superannuation, then you likely have yourself an employee. Contractors should take care of their own tax and super responsibilities.
But be aware, that in certain circumstances, contractors may be entitled to be paid superannuation contributions. Consult with your IR lawyer about this issue.
7 What About Leave? Such as Annual, Sick, Long-Service?
While contractors don’t receive paid leave from their employer, an employee is of course entitled to receive paid leave.
Make sure you’re not paying your contractors for ANY category of leave. You’re breaking the rules of engaging Contractors if you do.
That means a full time employee will qualify for annual leave, personal or carers’ leave, and long service leave; while casual employees receive a loading in lieu of leave entitlements.
Keep in mind, when you engage contractors, you can’t always pick & choose from the above: depending on your individual situation you may need to comply with ALL the issues, plus more.
Also, please do contact us if you have any feedback or comments.
With operations in more than 50 countries across five continents and decades of experience, we can assist with every aspect of your program.
If you are interested in discussing contractors vs employees for your organisation, please don’t hesitate to contact us.