The employee vs. contractor controversy
illustration28-300x198.jpgDetermine the difference to avoid the pitfalls

It has been a trending topic in the last few months and rightly so; it has become increasingly imperative that employers can confidently determine whether their workers are engaged as actual employees or independent contractors.

Many employers struggle with a clear understanding of the differences simply because they do not have the right information, basing big decisions on blurred boundaries, myths and misconceptions.  

Hiring an employee or engaging a contractor means that as an employer you will have a differing set of tax and super obligations to meet. Some of these obligations are focused on things like PAYG withholding tax, annual leave entitlements, GST and FBT.

But why is it so important to know the difference? 

According to Taxpayers Australia, an organisation that aims to educate taxpayers on a range of superannuation and taxation issues, failure to meet these quintessential duties means employers are likely to face a stream of claims for back pay, annual leave or compulsory superannuation entitlements.

 In some cases employers have attempted to disguise an employee arrangement as an independent contractor, usually for the purposes of accountability and employee entitlements, resulting in what is called a ‘sham contracting agreement'.

What happens now?

By compromising the condition of the Fair Work Act 2009, businesses are subject to severe penalties that may risk the existence of their organisation.

Change now

 The ATO has confirmed that it will be placing a heightened emphasis on checking if businesses have correctly engaged their workers, so it's far better for employers to change their ways now than to keep it as the norm.

What help is there?

Businesses are not alone and can access range of online resources to guide their decision including ATO fact sheets. The ATO has released an online decision tool where users work through a series of questions to determine whether their worker is an employee or contractor. Best of all this tool is user friendly, fast, anonymous and free. But beware - this resource is only reliable if responses are one hundred percent honest, so users who aren't entirely sure should not take it as gospel.

Determining the difference

Unfortunately there is no single indicator that can unveil the truth and the distinction lies within the totality of the working arrangement and overall context of the relationship. The ATO have listed the main distinctions below as a guide for employers. Some of the factors can be subjective so it is essential that employers revisit the contract for specific terms and conditions.  

Employee

Contractor  

An employee works in your business and is part of your business.

 A contractor is running their own business and provides services to your business.

  • The worker cannot sub-contract/delegate the work - they cannot pay someone else to do the work.
  • The worker is paid for the time worked, a price per item or activity, a commission.
  • Your business provides all or most of the equipment, tools and other assets to complete the work; the worker provides all or most of the equipment but your business provides them with an allowance or reimburses them for the cost.
  • The worker takes no commercial risks.
  • The employee works under the direction and control of their employer.
  • The worker is not operating independently from your business.
   
  • The worker is free to sub-contract/delegate work - they can pay someone else to do the work.
  • The worker is paid for a result achieved based on the quote they provided.
  • The worker provides all or most of the equipment, tools and other assets to complete the work; the worker does not get a reimbursement for the cost of the equipment, tools and other assets.
  • The worker takes commercial risks.
  • The worker has freedom in the way the work is done.
  • The worker is operating their own business.

Table: exact from ATO website 2012; Employee or contractor - know the difference.  

Beware of the myths The issue is that many businesses don't have the right information. These preconceptions may stem from the industry, organisational precedents or just inaccurate information.  

We have debunked some of the common myths from an ATO resource below which is available on their website.    

  • If a worker has an ABN number then they must be a contractor. This is incorrect. According the ATO, having or quoting an ABN does not make them a contractor - it makes no difference.
 
  • Employees cannot be used for short jobs or to get extra work done during busy periods. This is incorrect. The regularity of work or the duration of the job again makes no difference to their status.
 
  • A worker is a contractor if they submit an invoice for their work. This notion does not automatically make a contractor so. An employer will need to look at the totality of the working arrange and finely detail the specific terms and conditions under which the work is permitted.

Extracted from ATO website 2012; Common myths about the employee/contractor decision.

Getting answers

The employee and the contractor are treated differently and each has a set of specific employer obligations that must be observed.  As an important agenda, businesses should review all terms of a contract to ensure that it accurately reflects the true nature of the relationship.

Remember to avoid all myths or industry precedents - just because your industry employs the majority of contractors doesn't mean your specific working arrangement will be as well. If there is doubt, businesses should check now to save a costly and burdensome exercise in the future.

For more information on the distinction between contractors and employees you can visit the ATO website here and the Fair Work Australia website here. 

The ATO website covers the obligations you need to meet with both working arrangements.        

 
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