If your business client is looking to put on more staff, then by all means congratulate them. But they may also benefit from a follow-up warning.
In these days of the “gig economy”, the engagement status of workers has become an even more important distinction – whether they are employees or independent contractors – and has consequences that can get many employers into unforeseen hot water.
Sometimes contracting is necessary, for example when you require specialist skills that are not easily covered by placing a job ad. Some workers only want to be put on as a contractor, particularly where they service multiple clients. Contracting can also prove more cost efficient than employment.
However, there are dangers in engaging an individual as a “contractor” without having a proper understanding of the law. You may find that the individual is considered to be an “employee” regarding several and different legislative requirements, and this brings with it a range of legal obligations – and liabilities if you get it wrong. The ATO even encourages taxpayers to dob in a business incorrectly treating employees as contractors.
The ATO says businesses that incorrectly treat employees as contractors face penalties and charges, including:
- PAYG withholding penalty for not meeting their PAYG withholding obligations
- super guarantee charge (for not meeting their super obligations), made up of:
- super guarantee shortfall amounts (amount of super contributions that should have been paid into a complying fund)
- an administration fee.
There are several areas of both tax and employment legislation that can trip up employers regarding the contractor/employee divide.
Webinar: Employees vs Contractors. Recorded 7 August 2018.
Covers the definitions of employees and contractors,
and the consequences of being an employee or a contractor.
The recording is available here.
Naturally the ATO expects that PAYG withholding is withheld from payments to employees, and it has an online employee/contractor decision tool to determine the status of workers (there’s also a similar tool on the business.gov.au site).
If you enter into an arrangement that is through a partnership, trust or company, that operates under a bona fide contracting arrangement and provides an ABN, this may mean that no PAYG amounts are required to be withheld. But this is the sticking point for many ATO decisions — whether arrangements are genuine or sham.
The Superannuation Guarantee (SG) law requires that contributions are made on behalf of “employees”, which is a term that is even defined in the relevant ruling. “If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”
This extended definition of employee means that, if you engage an individual as a contractor, you may need to pay superannuation contributions for their benefit, even if your written contract with them does not provide for this, and even if they use an ABN.
Most states and territories have provisions written into their payroll tax laws to cover the use of contractors (scroll down). These generally deem payments made to contractors to be “taxable wages” and thus subject to payroll tax — although there may be concessions and exemptions depending on the jurisdiction, so it’s best to check. This Payroll Tax Australia page has links to each state and territory legislation.
Be aware that in some jurisdictions in Australia, workers compensation legislation may require such insurance cover for workers taken on as contractors. In Queensland for example, this is required for any “worker”, the definition of which includes a contractor put on for “labour only or substantially for labour only” (this WorkCover Queensland site explains this).
This page of the business.gov.au website has links to guidance for every state and territory WorkCover authority.
The ATO says that it has encountered several myths and assumptions adopted by both workers and employers when it comes to trying to decide the tax status of a job appointment. See this page for a checklist of the deciding factors, this ATO page for the differences between the two, and also see the following ATO video for the most common myths, and the truth behind them.
BONUS: See the following Business.gov.au webpage for free brochures “Contracts made simple” (helps independent contractors save time and money by explaining how to minimise business risks and negotiate good contracts) and “The essential handbook” (tells independent contractors and their hirers all they need to know including tax, super, insurance, workers compensation, negotiating contracts and much more).