If your business is looking to put on more staff, first of all: congratulations. But secondly, a warning. The engagement status of workers is an important distinction – whether they are employees or independent contractors – and has consequences that can get many employers into unforeseen hot water. Hired a “contractor” who is really an employee? There are consequences 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 Tax Office even encourages taxpayers to dob in a business incorrectly treating employees and contractors.
The Tax Office says businesses that incorrectly treat employees as contractors face penalties and charges, including:
PAYG withholding penalty for not meeting their PAYG withholding obligationssuper 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)interestan administration fee.
There are several areas of both tax and employment legislation that can trip up employers regarding the contractor/employee divide.
PAYG withholding Naturally the Tax Office 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 a separate one for the construction industry).
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 withheld. But this is the sticking point for many Tax Office decisions — whether arrangements are genuine or sham.
Superannuation 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.
Payroll tax Most states and territories (all except Western Australia) 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.
Workers compensation 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.
Myths busted The Tax Office 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 the most common myths, and the truth behind them.
BONUS: A government handbook for all things an independent contractor will need to know. Download ‘Contracts Made Simple‘ or an alternative brochure ‘Independent Contractors: The Essential Handbook‘ (although they’re 53 and 45 pages, so if you’re thinking of printing them out you might like to order your free copy from the Department of Industry — contact business.gov.au or call 13 28 46).
Tax Wrap Episode 48 — Employees vs contractors – getting the tax right
# [fbt], [pay less tax], [remuneration], [salary packaging], [salary sacrifice]
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