Avoid Errors in Employees vs Contractors
The Current Tax Landscape
The ATO and State Revenues are now far better at identifying and pursuing non-compliant employers. Knowing the difference is important because it impacts Tax Withholding, Superannuation, Fringe Benefits Tax, WorkCover, Payroll Tax and Pay Awards.
Failure to comply can result in back pay or adjustments, penalties and interest. It is critical to understand these employment/tax rules and obligations, and take steps to manage them.
Key Differences
No single factor is determinative of the relationship, it is necessary to look at its real substance. The major factors to consider are:
Control – a contractor runs a business, usually engaging their own employees or subcontractors
Payment Basis – employees are paid for time, contractors are remunerated for the completion of an agreed result
Independence – an employee is part of the employer's business, but contractors are free to take on other work and have the flexibility to decide what work they will do, and when
Risk – a contractor is liable for defects and to rectify the work at their own cost
Equipment – contractors provide the equipment and Plant to carry out the work.
Common Misconceptions
An ABN does not make a person an independent contractor
Using the name or even having a written agreement also does not suffice
Even though a person consents to be engaged as a contractor it does not remove the financial and legal liabilities of the employer
'Everybody does it' is not sufficient cause
Definitions are not always the same for different tax purposes (eg., an individual contractor is entitled to superannuation and WorkCover).
Consequences of Getting it Wrong
The Fair Work Act refers to 'sham contracting', making the employer liable for substantial penalties (up to $63,000)
Disgruntled contractors make claims with Fair Work for underpayment, the ATO for superannuation entitlements (no statute of limitations applies), and WorkCover for injuries
Where a contractor is determined to be an employee, Fair Work acts for them to claim back pay, leave and other entitlements. The employer is liable to shortfalls of wages etc., and often substantial penalties. Directors are personally liable for unpaid PAYG Withholding and Superannuation under the Director Penalty Regime, and the ATO will recover from their personal assets.
Superannuation is a key audit risk for the ATO, and targets arrangements where it should have been paid. The ATO often goes back for 3 years, but there is no limit on time.
Get It Right
Review existing arrangements, look carefully at contracts especially with individuals, and ensure they are compliant and effective. The ATO website has an online tool to determine employee or contractor, at:
Current Situation
We are starting to see more audits in this area, the ATO and Fair Work are aggressive in determining the situation. Consider taking audit insurance, this could protect you for costs although won't protect you for the findings and penalties.
'Contracting' may initially save you some paperwork but remember, the employer is the liable party. We'd be happy to go over your arrangements and discuss your concerns.