Contractor Payroll

Everything You Need to Know About Contractor Payrolling

Right now, contingent workers make up around one third of the workforce in Australia and New Zealand. What’s more, 62% of business leaders predict that their workforce will incorporate more contingent staff in the future, and many experts predict the workforce will be 50% contingent by 2028.

In today’s workforces, contingent work has grown larger than retail staff, temporary reception roles, or call centre workers. The modern contingent worker is often a highly skilled professional that chooses to work for a variety of companies depending on their interest and work schedule.

Because of the rapid rise of contingent workers, organisations need to have a comprehensive understanding and capability around accurately and efficiently paying them. In the article, we answer some of the biggest questions regarding contingent worker payroll.

How are contractors paid?

Contingent workers are prolific in most industries in a variety of role types, from project managers, developers, engineers and analysts. Typically, they’re paid either through a time and materials arrangement, or milestone based. We’ve outlined these below:

  • Time and materials – these contractors are paid on an hourly or daily rate.
  • Milestone – otherwise called outcome-based, these contractors are paid an agreed rate at the completion of a project.

Many organisations employ contingent workers under a statement of work (SOW) arrangement. A SOW document outlines the contractual arrangement and specifies the required outcome for the contingent worker to complete.

As we’ve outlined in our risk diagnostic tool, some companies employ SOW contractors under time and materials – which is considered as sham contracting. In these circumstances, the company pays an hourly or daily rate, with no visibility on preferred supplier margin or specified outcomes. This leads to inflated costs – often 30% higher than traditional contingent workers.

Contractor payroll tax

Do you pay payroll tax on contractors?

Organisations pay payroll tax to State Governments based on the wages of their workers. But not all contractor wages are considered taxable wages. If a contractor falls under one of these nine exceptions, employers do not have to pay payroll tax.

  • If the contractor owns and drives a vehicle for their job.
  • If the contractor only sells insurance.
  • If the contractor is a door-to-door seller.
  • If the contractor provides services to one principal for 90 days or less in a year.
  • If the contractor engages others to do all or part of the work.
  • If the contractor’s labour is secondary to them supplying materials or equipment.
  • The services provided are not usually required in the principal’s ongoing business, and the contractor provides these services to a range of clients.
  • The services are usually required less than 180 days in a year.
  • The services are approved by The Commissioner as exempt.

Although the payroll tax rate varies depending on the state, most provisions in the Payroll Tax Act are similar to one another across Australia.

There are penalties for those that don’t pay their contractors’ payroll tax on time. Employers will need to pay interest on any payments outstanding, and potentially a flat penalty percentage depending on the jurisdiction.

Do I need to make superannuation contributions to contractors?

Organisations need to make super contributions if you’re engaging them mostly for their labour. This means:

  • You’re paying them wholly for their skills.
  • They’re performing the work personally.
  • You’re paying them for hours worked, not to achieve a result.

For contractors that are set up as a company (i.e., Pty Ltd), organisations do not need to pay superannuation.

Recently, the government has introduced legislation to parliament to ensure employers are setting up workers with their own default superannuation fund, not the preferred employer fund. If passed, employers must pay employees into a ‘stapled fund’ (either the last fund that contributions were paid into, or the fund with the largest balance) rather than an employer’s default fund.

CXC has implemented changes to our process in advance of this law, ensuring that contingent workers are provided with a complete view of their superannuation, as well as the opportunity to automatically find past superannuation accounts and consolidate these during their onboarding process.

Contractor benefits

Do I need to provide benefits to my contingent workers?

Many employers neglect to include contractors in the benefit programs they provide to permanent workers. This is a significant missed opportunity to increase the engagement, productivity and wellbeing of your extended workforce.

The cost of replacing permanent workers is around 30% of their annual salary. Although this cost isn’t as high for contractors, organisations can save significant amounts if a contractor decides to stay with the company, either through redeployment or working on a different project. Contractor benefit programs can help attract and retain these contractors.

In addition to process and experience improvements for all stakeholders through CXC’s model, we provide a dedicated contingent worker care program. This program is focused on treating contingent workers like the professionals they are, giving them access to a diverse package of benefits. This differentiates our service from recruitment-focused providers and strengthens your brand among professional level contingent workers.

Payroll system

What system should you use to payroll contractors?

Some organisations payroll their contingent workforce through their permanent employee systems and processes. Others use vendor management system (VMS) technology, such as Beeline or SAP Fieldglass.

Regardless of the solution you choose to adopt, organisations need to be mindful of:

  • Ensuring payment accuracy.
  • Gaining complete visibility of the workforce through analytics.
  • Ensuring payroll technology is compliant to all relevant laws.

CXC ensures consistent and reliable payment cycles with all contractors. With multiple checks and balances in place through our automated MyExchange system and client services team, we have established robust measures to minimise payroll issues. We provide our contractors with a detailed payroll calendar, outlining key dates for timesheet submission to ensure timely and accurate pay cycles.

MyExchange:

  • Enables the individuals to lodge time and attendance sheets and expense reimbursement claims, review the status of each lodgement, as well as review historical timesheet and expense claim submissions.
  • Enables the hiring/approval manager to view current and historical spending, rejected and approved status timesheets and expense claims for all individuals under their management.
  • Information is then automatically linked to our payroll system, enabling us to complete the payroll process based on approved timesheet data.

Best practice contingent workforce management

To achieve best practice in the current market, human resources should manage the contingent workforce directly, while outsourcing employment and contractor pay risks. This requires building an internal talent pool, managing the recruitment process to the point of selection, then allowing contingent workforce management companies to facilitate onboarding, employment and contractor pay.

A plethora of organisations and solutions like Managed Service Providers (MSPs), Recruitment Process Outsourcing (RPO), Human Resources Information Systems (HRISs) and Vendor Management Systems (VMSs) have evolved. Each provides a solution, but very few cover all aspects in a flexible manner. Because of underlying technology, each provider is limited in their offering, hence corporations are tending to pick and choose partial solutions and then cobble these together.

Typically, an RPO system that is designed to manage hundreds of applicants to a job advertisement is not much use when there no applicants, so a proactive search function is required. Similarly, organisations often have diverse requirements and there is realistically no one size fits all solution. The single most important component is to select is a vendor neutral service layer that is able to then select and implement the most suitable technology. Most technology has been developed to address permanent recruitment, as this is where the traditional market has been.

Very few suppliers to corporations cater for building internal talent pools, which companies can own, because this is contrary to their business model. None of these systems provide the transactional part of effective management of payroll tax on contractors.

With social media and job boards, corporations can now attract and find much of their talent requirements easily. Recruitment agencies still have a valid role in filling those hard-to-find positions and specific specialists. Simple and effective use of technology can save organisations huge amounts of money in the recruitment space, provided that they have systems to handle the requisitions, onboarding and contractor pay. Use and integration of these technologies and selecting the best combination of tools is a complex area best left to specialists.

As one of the world’s top suppliers of contingent worker management solutions, CXC is perfectly positioned to optimise all elements of your contingent workforce strategy. With operations in more than 50 countries across 5 continents, and with decades of experience, we can assist with every aspect of your program.

If you would like to find out more about how we can help with your contingent workforce solutions please contact us.

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