Free Contractor Payroll: If it sounds too good to be true it probably is…

The trial against the alleged ringleaders behind the $105 million payroll tax fraud has begun in the Supreme court. According to The Crown, Plutus Payroll offered fee-free payroll services while keeping PAYG withholding tax that should have gone to the Australian Tax Office.

Crown prosecutor Paul McGuire submitted that the free payroll services offered was “just too good to be true”.

Given this and other high-profile instances of contractor payroll noncompliance, many clients are revisiting their strategy around how they engage non-permanent workers (commonly referred to as ‘contractors’ or ‘contingent workers’).

As this sector is complex and often misunderstood, I found it difficult to figure out where to start an article on this subject. I think the easiest place to start is the common misconception that ‘contractor payroll’ is just that: payroll.

What do contractor payroll organisations do?

Colum McGrath, former Head of Enterprise Solutions at CXC, wrote a previous article on this, so I don’t want to cover old ground, but in short, most ‘contractor payroll’ organisations are more accurately ‘workforce management companies’ or ‘on-hire companies’, and are better referred to as such. Unlike a payroll provider who simply processes payroll, an on-hire company is either totally or largely responsible for many of the statutory ’employment/tax’ obligations such as:

  • Contractor engagement and agreements
  • Modern awards
  • Workers’ compensation
  • Work health & safety
  • Professional indemnity and public liability
  • Employment taxes
  • Payroll tax
  • Tenure management

Also, most ‘on hire’ companies (including recruitment agencies who engage, manage and payroll the contractors) process payment to ‘their’ contractors prior to receiving payment from the client. Hence, they finance workers’ wages prior to payment for the client. As you can imagine this can be a significant amount of money to be out of pocket if the volume of contractors is large.

Free contractor payroll?

Where am I going with this?

For a number of years, I was amazed that a contractor payroll company in Australia was offering services for free! Not only that, there were also rumours they were offering large rebates to individuals and companies who referred contractors (from recent press articles I read, this appears to be true).

The simple question appeared to be: ‘how are they making money while maintaining compliance?’

It seemed it was too good to be true… and it was.

Another point to note is that non-compliance to this sector is not unique to Australia. Very recently the directors of a UK Contractor Payroll/Umbrella Company who defrauded £45million have been jailed for a total of almost three decades, in what is said to be the UK’s largest ever ‘payroll fraud’ of its kind.

My hope is that with all this publicity, this sector will finally get the attention it deserves and that organisations engaging non-permanent talent will scrutinise the legitimacy of these arrangements.

Along with this, there is a need for government bodies to redesign and adopt legislation appropriate to this sector and minimise ‘the grey areas’ to ensure consistency and minimise the potential of rogue offerings.