Do you know whether your worker is legally an employee or a contractor?
There are plenty of myths and assumptions made when it comes to deciding the status of a worker. Many employers (and workers) rely on inaccurate indicators of what makes a worker an employee or contractor. However, the employee-or-contractor status is important to get right.
Whether you intend to or not, wrongly treating an employee as a contractor means you are breaking the law. Yep, it’s that serious.
It’s taken so seriously because businesses that do this are avoiding their tax and super obligations, and they are not providing workers with all their entitlements. In doing so, they reduce their labour costs and gain an unfair competitive advantage. Accordingly, there are significant penalties and charges for getting this wrong (see more below). We want to help you avoid making these mistakes in your business!
How do you know whether your worker is legally an employee or a contractor?
The Australian Taxation Office (ATO) gives six factors you can consider when determining the job status of your workers. No single factor is a defining factor; they must all be considered together.
|FACTOR||EMPLOYEE INDICATORS||CONTRACTOR INDICATORS|
|Ability to sub-contract or delegate work||Can’t pay someone else to do the work||Can pay someone else to do the work|
|Control over work||Doesn’t control how the work is done||Controls how the work is done (subject to meeting the terms of the agreement/contract)|
|Basis of payment||Paid by: > time worked, > price per item/activity, or > commission||Paid for a quoted price, for achieving an agreed result|
|Equipment, tools or other assets||Your business provides: > all or most of these, or > an allowance or reimbursement for the cost of these||Is required to provide these items at own cost|
|Commercial risk||Commercial risk / legal responsibility remains with your business||Holds commercial risk / legal responsibility|
|Independence||Works within and is considered part of your business||Operates own business independently and is free to accept or reject additional work|
Ultimately, whether a worker is an employee or contractor will always depend on the whole working arrangement, and the specific terms and conditions under which the work is performed.
So, let’s clarify 12 common myths identified by the ATO:
Myth 1: The ABN
Having an Australian business number (ABN) means the worker is a contractor.
- Whether the worker has or quotes an ABN makes no difference to the job status.
- An ABN will not change an employee into a contractor.
Myth 2: Widespread practice
It’s common in my industry to take on workers as contractors, so my business should too.
- Other businesses might not have it right!
- Don’t use “common industry practice” to decide whether your worker is an employee or a contractor.
Myth 3: Short-term work
Employees can’t be used for short-term work.
- The length of a job, or regularity of work, makes no difference to whether a worker is an employee or contractor.
- Both employees and contractors can be used for:
- casual, temporary, on call and infrequent work,
- busy periods, and
- short jobs, specific tasks and projects.
Myth 4: 80% rule
A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.
- The 80% rule (also known as the 80/20 rule) relates to personal services income (PSI), not whether a worker is an employee or contractor.
- The rule is used to determine:
- how a contractor reports their income in their own tax return, and
- if a contractor can claim some business-like deductions.
Myth 5: Past use of contractors
My business has always used contractors in the past, so we do not need to check whether new workers are employees or contractors.
- Even the slightest change to arrangements can change whether a worker is an employee or contractor.
- Mind the snowball effect! If you got it wrong in the past, relying on your original “contractor” decision would mean you could, for example, continue incorrectly treating all future workers as contractors when they are employees.
- Check the working arrangements for every job engagement.
Myth 6: Registered business name
If a worker has a registered business name, they are a contractor.
- Having a registered business name makes no difference to whether a worker should be an employee or contractor for a particular job.
Myth 7: Contracting on different jobs
If a worker is a contractor for one job, they will be a contractor for all jobs.
- If a worker is a contractor for one job, it does not guarantee they will be a contractor for every job.
- Depending on the working arrangements, a worker could be:
- an employee for one job and a contractor for the next, or
- an employee for one job and a contractor for another, at the same time, for different businesses.
Myth 8: Paying super
My business should only take on contractors so that we won’t have to worry about super.
- You don’t get to decide to treat a worker as a contractor when they are an employee.
- You may be required to pay super for contractors anyway! If you pay an individual contractor under a contract that is “wholly or principally for the labour of the person”, you must pay super contributions for them.
Myth 9: Specialist skills or qualifications
Workers used for their specialist skills or qualifications should be engaged as contractors.
- Qualifications or the level of skill a worker has makes no difference to whether a worker is an employee or contractor.
Myth 10: Worker wants to be a contractor
My worker wants to be a contractor, so my business should take them on as a contractor.
- A worker doesn’t get to decide whether to be treated as an employee or contractor.
- A worker’s preference to work as a contractor does not mean your business should engage them as such.
- If you give into pressure and agree to treat an employee as a contractor, you can face penalties, interest and charges for not meeting your tax and super obligations.
Myth 11: Using invoices
If a worker submits an invoice for their work, they are a contractor.
- Submitting an invoice or being paid based on an invoice will not change an employee into a contractor.
Myth 12: Contracts
If a worker’s contract says they are a contractor, then they are a contractor.
- If a worker is legally an employee, a contract saying the worker is a contractor will not make the worker a contractor at law.
- Such a contract will not:
- override the employment relationship or change the worker into a contractor, nor
- change the PAYG withholding and super obligations your business is required to meet.
What are the penalties?
Making the right determination as to whether a worker is an employee or contractor can have significant tax and superannuation consequences. Get it wrong and you could be landed with nasty penalties, interest and charges, including:
- PAYG withholding penalty,
- super guarantee charge, including the shortfall amount, interest and administration fee, and
- additional super guarantee charges of up to 200%
We recommend that you look at every working arrangement closely! If in doubt, seek assistance.
Need a hand? A Synectic adviser can help you work it out.
(This post was originally posted on 28 May, 2015 and updated on 26 Oct, 2018)