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Why consider the contractor issue now?
The contractor issue is not at all new, nor has it been subject to any dramatic recent change. However, there are a number of diverse factors that have brought this issue back to the spotlight.
- Growth in the number of Contractors: There has been an increase in contractors over recent years.
- Government / Treasury Attention: Contractor reporting regimes have been introduced for several industries.
- Tax Office Attention: The Tax Office's audit activity is evidence of how important the contractor issue has become.
- Institutional attention: It is reasonable to expect that union scrutiny of contractor arrangements will continue.
- Legal rulings: Cases have concluded which consider these arrangements.
Determining your obligations requires a detailed review of the legislation and case law under each specific area.
What are your obligations?
There are very different obligations depending on whether you engage a contractor or employee in such areas as:
- PAYG Withholding
- Payroll Tax
- Superannuation Guarantee
- Fringe Benefits Tax
- Workers' Compensation, and
- The Fair Work Act
Review our Salary/Wages, Superannuation, Return to Work SA & Payroll Tax (SA) Matrix for more information.
Why the complexities?
Whether an entity is an employee or a contractor is not clear cut. An employee is rarely defined in any legislation and therefore case law is often the only guide to define this relationship.
Determining a worker’s status depends upon the terms and conditions under which the work is performed.
Recent cases have shifted attention to a formal agreement being in place between parties.
Agreements are important
With more weight now given to agreements, we recommend all contractor agreements are reviewed and documented.
Formal written agreements should be developed with consideration given to the key factors listed below. In particular, recent case law has indicated where robust written agreements are in place, there will be significant factors when considering an arrangement. If agreements are poorly written, courts will look beyond them to the factors listed below. We recommend engaging appropriate legal advice when preparing your contractor agreements.
Factors to consider
We have provided a table below to help structure your agreements and determine whether you have engaged a contractor or employee.
| Factors to consider | Employee | Contractor |
|---|---|---|
| Control over work | The employer has an implied right in the industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit. | A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their discretion. |
| Independence | An employee works in the business of the payer. Their work is an integral part of the business. | Although the work of a contractor is done for the business, it is not integrated into it but is ancillary to it. |
| Payment | Payment is often based on the period of time worked, but an employee can also work on ‘piece rates’ or commission. | Payment is dependent on the performance of the contracted services. |
| Commercial risks | An employee generally bears no legal risks in respect of the work: since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee. | A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense. |
| Ability to delegate | An employee performs the work personally and generally cannot subcontract the work to someone else. | Unless otherwise specified in the contract, a contractor can subcontract or delegate the work. |
| Tools and equipment | The employer, except when specifically agreed otherwise, usually provides tools and equipment. | Generally, a contractor provides their own tools and equipment. |
Does the worker have an ABN?
If a worker has an Australian business number (ABN) this does not automatically mean the worker is a contractor. You still need to consider the nature of your agreement with the worker.
What if the contractor is a company, trust or partnership?
A contractor that is a company, trust or partnership is more likely to be treated as a contractor, however if a structure is ultimately put in place to avoid an employment relationship, it is likely that the authorities will look through the structure.
Please review our Independent Contractor v Employee Checklist which offer a series of questions designed to prompt assessment of the relationship between Principals and Contractors, and the potential of that relationship being assessed at common law as an employment relationship.
Discuss Further?
If you would like to discuss, please get in touch.
Disclaimer
The information provided in this information sheet does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.
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Kalleske Vineyards Pty Ltd
