Contracting is evolving

As an alternative to the traditional employment relationship across many sectors and is particularly widespread as a mode of working engagement in the construction industry.

A contractor can be hired directly through an another entity or using a labour-hire agency. 

"According to the ATO, an employee works in your business and is part of your business, while a contractor runs their own race."

While some businesses may prefer to employ their workers, sometimes contracting is necessary. For example, maybe the business requires specialist skills to complete a project as these talents may not be available within their existing team. Alternatively, some skilled individuals may prefer to operate as contractors, particularly if they have various clients. 

Contracting can also prove more cost-efficient than traditional employment as bosses don’t have to pay holiday and sick leave entitlements. However, there are risks when engaging an individual as a ‘contractor’, especially if you don’t understand the following:

• laws relating to the use of contractors,
• tax obligations,
• superannuation,
• insurance, and
• long service leave responsibilities. 

For example, according to the law, a contractor may indeed tick all the boxes to be an employee, which brings a range of legal obligations for an employer – and liabilities if you were to get it wrong.

Difference between employees and contractors

According to the ATO, an employee works in your business and is part of your business, while a contractor runs their own race. There are other variances too. For example, a worker can’t subcontract someone else to do their work. In contrast, a contractor can pay someone else to complete the job.

An employee is paid for time worked, using a price per item or through a commission. On the other hand, a subcontractor is compensated according to their tabled quote before the job begins. In the construction industry, quotes are calculated using hourly rates or price per item to work out the total cost of the work.

Employees must be provided with all the equipment, tools and other assets required to complete their work. On the flip side, a contractor will arrive on site with their tools and equipment. 

Furthermore, when it comes to responsibility for commercial risks, an employee wears no liability for covering the costs of rectifying defective work. Whereas, a contractor is legally responsible for all work rendered, such as being liable for the cost of repairing a defect in their work, which leads into the issue of insurance coverage. 

Your tax and super obligations

Whether you hire a contractor for a day, a week, or a year or a small or large construction project, they must have appropriate insurance cover. This cover will protect the contractor and their business and safeguard your business into the bargain.

It is also essential that business owners recognise that their existing insurance policies may not cover contractors, as exclusions often apply to activities executed by external contractors. So instead, the contractor must have up-to-date “public liability” and “professional indemnity” policies.

Public liability covers property damage or personal injury caused by business activities and typically covers the legal costs associated with a claim, the employees of your contractor, loss of damage or goods or injury to a third party. 

Along with public liability, a contractor must also have adequate legal liability protection, such as professional indemnity insurance. Professional indemnity covers the business owner for any legal liability concerning advice and services given to your clients. Businesses would be well advised that (in most cases) professional indemnity insurance won’t cover external contractors.

"You must also pay super, at least quarterly, for eligible employees and report and pay fringe benefits tax (FBT) - that is, if you provide your employee with fringe benefits."

There are several other insurances such as ‘contract works insurance’, ‘plant and equipment insurance’ and ‘workers compensation’ that contractors might have taken out. Still, the public liability and professional indemnity certificates are of utmost importance to protect a business and its owners. Moreover, if a contractor doesn’t have these policies in place, you might be better off looking elsewhere. 

Your tax and super obligations

Portable long service leave

If you think using contractors reduces a construction businesses leave entitlements, think again. While you don’t have to fork out for holiday pay, in South Australia, workers who spend at least half of their time on-site performing building services, electrical or metal trades work are entitled to portable long service leave. This entitlement means a contractor doesn’t have to work for the same business for ten years to be eligible for long service leave.

To cover the costs of this scheme, businesses must pay a levy to the Construction Industry Fund every two months. The current levy rate of 2% is fixed by the Construction Industry Long Service Leave Board. To find out more about your long service leave obligations for contractors working on your projects, Brentnalls SA has produced an information sheet: Portable Long Service Leave.

Disclaimer

The information provided in this article 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.