Employee or Contractor?

Determining whether someone working for you is an employee or a contractor is a crucial aspect of running a business, affecting everything from Payroll to Superannuation, Workers Compensation and legal responsibilities. 

Here are a few myths that you need to consider when classifying your workers. 

Myth: If a worker has an ABN they are a contractor 

Fact:  Some businesses request a worker to obtain an ABN, believing this will make them a contractor in the eyes of the Australian Taxation Office (ATO). This cannot be further from the truth.  Having an ABN will make no difference if the working arrangement is one of employer and employee rather than that of a contractor.  

Myth: Everyone in my industry takes on workers as contractors, so my business can too! 

Fact: Just because other businesses treat workers as contractors, does not mean its correct under the law.  Ignore the temptation to do what others do without seeking advice or doing your own homework on your circumstances. 

Myth: Employees cannot be used for short jobs or to get extra work done during busy periods. 

Fact: The length of a job or regularity of work makes no difference to whether a worker is classed as an employee or contractor. Both employees and contractors can be used for: 

• casual, temporary, on-call and infrequent work 
• busy periods 
• short jobs, specific tasks, or projects 

Myth: My business has always treated workers as contractors, so we do not need to check whether existing or new workers are employees or contractors 

Fact: Just because you have been doing something a particular period of time doesn’t make it right in the eyes of the law. For both existing and new workers, you should check whether the worker is an employee or contractor by examining the entire working arrangement. The law currently requires that when determining whether a worker is an employee or a contractor the overarching general principle you need to determine is whether the worker is “serving” in your business, or “running their own business”. 

Myth: If a worker has a registered business name, they are a contractor 

Fact: Having a registered business name makes no difference as to whether a worker is an employee or contractor. 

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 a contractor for each job. 

Myth: My business should only take on contractors, so we do not have to worry about super 

Fact: This myth is widely misunderstood in businesses.  Businesses are still required to pay super for some contractors.  As an example, if you pay an individual contractor under a contract that is wholly or principally for the person’s labour, you need to pay super contributions for them.  Accounting software now has features inbuilt that allow this to occur through the payroll area of the software. 

Myth: Workers used for their specialist skills or qualifications should be engaged as contractors 

Fact: If a business takes on a worker for their specialist skills or qualifications it does not automatically mean they are a contractor. A worker with specialist skills or qualifications can be either an employee or contractor.  The terms and conditions under the arrangement between them and the business will determine which they are.  

Myth: My worker wants to be a contractor, so my business should treat them as one 

Fact: Just because a worker has a preference to work as a contractor, does not mean your business can engage them as a contractor.  If you give into pressure and agree to treat an employee as a contractor, you can face penalties and charges for not meeting your tax and super obligations.   

Myth: If a worker submits an invoice for their work, they are a contractor 

Fact: Submitting an invoice for work done or being “paid on invoice” does not make a worker a contractor. 

Myth: If a worker’s contract has a section that says they are a contractor, then legally they are a contractor 

Fact: Businesses and workers will sometimes include specific words or labels in a written contract to say that the working arrangement is one of contracting in the mistaken belief that this will make the worker a contractor at law. If a worker is legally an employee with all facts considered, a contract specifying or labelling the worker as a contractor makes no difference will not: 

• override the employment relationship or change the worker into a contractor 
• change the PAYG withholding and super obligations a business is required to meet. 

In many of the cases where businesses wrongly classify workers as contractors is when they are dealing with an individual or a partnership with an abn.  So, take particular care in this area. 

For some peace of mind – An employee must be a natural person. If you’ve hired a company, trust, or partnership to do the work, this is the contracting relationship for tax and super purposes. The people who do the work may be directors, partners, or employees of the contractor but they’re not your employees. 

The myth busters above have referred repeatedly to the terms and conditions of the relationship between the business and worker in determining the true classification in the ATO’s eye. Here is a brief summary, certainly not an exhaustive list, of factors that should be considered: 

• Who controls how, when and where the work is done? 
• Is the worker serving your business or working to further their own business? 
• Is the worker remunerated based on time spent at hourly rate or for a result or fixed fee? 
• Does the worker need to perform the work, or can they delegate or subcontract it out? 
• Do you provide the worker with tools to do the job, or do they provide their own? 
• Consider how integrated the worker is within your business.  For example, do they wear your uniform? 
• Who bears the risk of rectifying work defects? 
• Does your business benefit from goodwill created by the work being done by the worker or does the workers business benefit in this way? 

As you can see the whole area of employee v contractor is widely misconstrued and misunderstood by businesses.   

We suggest when considering your next new relationship with a worker, where you are uncertain as to the actual nature of your relationship, that you seek advice from your advisor. 

We also suggest that if you have any uncertainties regarding your treatment of existing relationships that you do a review now to determine if you are at risk in regard to any of them.   

Knowledge is power, as they say. 

Doing so could limit your exposure to unpaid PAYGW, Superannuation and Workers Compensation Insurance with no subsequent easy recourse for reimbursement from the worker. 

For more information on this space here is a handy link to information on the ATO website

Difference between employees and independent contractors | Australian Taxation Office