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Employees vs. Contractors: The Never Ending Debate

Employees vs. Contractors: The Never Ending Debate

Author: Admin/Tuesday, November 18, 2014/Categories: Blog

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We’ve talked previously about the importance of being diligent when differentiating employees and contractors.

It’s a complex and important issue with potentially significant taxation, legal and insolvency implications for Australian businesses. And the ATO has been paying close attention, for several years now, to how businesses engage employees with a view to identifying and penalising those that use the “contractor” label in order to avoid PAYG, superannuation and other obligations.

However the delineation between an employee and an independent contractor is not as clear-cut as many think and can catch out even well meaning businesses. Simply hiring someone with an ABN and calling them a contractor is not necessarily enough.

What constitutes employment?

One of the problems confronting businesses is that there is no concise explanation of the difference between employees and contractors. The ATO tells us to consider the “whole working arrangement”. In fact there are a number of indicators that have been identified by the courts over the years that should be assessed.

Some types of workers – apprentices, trainees, company directors, labourers and trades assistants – are automatically employees. For others, the following factors determine a worker’s status as employee or contractor.

  • Ability to sub contract: Employees generally can’t sub contract work, whereas contractors are able to pay someone else to perform work

  • Basis of payment: An employee is paid based on time worked, a price per item or a commission, while a contractor is paid for a result achieved based on a quote provided

  • Equipment, tools and other assets: Businesses generally provide all or most of the equipment, tools and other assets required to complete work, or an allowance or reimbursement. On the other hand contractors usually provide all or most of their equipment

  • Commercial risks: Businesses are responsible for the work performed by employees and liable for the costs of rectifying defects, whereas contractors are often legally responsible for their work

  • Control over the work: Employees are normally directed by a business as to how to perform work, including hours of work, and can be suspended or dismissed. Contractors, on the other hand, usually have freedom to perform work as they determine, subject to terms in a contract

  • Independence: Employees are considered part of a business, whereas contractors work independently, operating their own business.

Additional considerations may include whether workers wholly or mostly work only for one employer, as opposed to providing services to other businesses; that employers are responsible for insurance including workers compensation and professional indemnity; and that employers are responsible for entitlements such as paid leave and benefits.

What are the implications for getting it wrong?

If a business is found to have shortfalls in PAYG, super guarantee or worker’s compensation premiums (through incorrectly identifying employees as contractors) it may face significant financial penalties, including backdated penalties.

In addition, a worker incorrectly labelled as a contractor may submit claims for unfair dismissal, or sue the employer for unpaid benefits and entitlements. Such cases have been heard in the courts in Australia.

The targeting of “sham” contracting arrangements – for example a threat to dismiss an employee to then re-engage them as a contractor – can also result in significant fines of up to $51,000 for a company and $10,200 for an individual.

Stay on the right side of employment law

If you engage or are considering engaging independent contractors we strongly advise you to get professional advice to ensure your agreements and arrangements are in order.

If you have any doubts about your existing arrangements, don’t hesitate to contact us for a confidential discussion.

Disclaimer: This information is generic in nature and provided on a discretionary basis only. You must always seek professional advice regarding its applicability to your own circumstance.

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