Payroll matters: Contractor versus employee
When a business considers engaging someone to perform work, often the decision is about whether to engage them as an employee or as a contractor. The decision is sometimes quite difficult, and the difference has implications for items such as, yet not limited to, taxation, superannuation, control and liability.
In this update, we review the characteristics of both a contractor and an employee and provide some tips on what to consider when engaging workers to ensure risks are minimised.
What are the key differences between an employee and a contractor?
The Fair Work Act, the Australian Taxation Office and other legislation places controls on the engagement of both contractors and employees.
To correctly determine whether a worker is an employee or contractor, the whole working arrangement needs to be examined. For example, a worker is not automatically a contractor just because they have an ABN or specialist skills or you only need them during busy periods or if the worker simply wants to be a contractor for personal reasons.
Here are some common indicators that may contribute to determining whether a person is an employee or an independent contractor:
|Degree of control over how work is performed
||Performs work, under the direction and control of their employer, on an ongoing basis.
||Under agreement, decides what hours to work to complete the specific task.
|Hours of work
||Generally works standard or set hours (note: a casual employee's hours may vary from week to week).
||Has a high level of control in how the work is done.
|Expectation of work
||Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period).
||Usually engaged for a specific task
||Bears no financial risk (this is the responsibility of their employer).Tools and equipment are generally provided by the employer, or a tool allowance is provided.
||Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.
||Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.
||Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).
|Tools and Equipment
||Tools and equipment are generally provided by the employer, or a tool allowance is provided.
||Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).
||Has income tax deducted by their employer.
||Pays their own tax and GST to the Australian Taxation Office.
|Method of Payment
||Paid regularly (for example, weekly/fortnightly/monthly).
||Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
||Entitled to receive paid leave (for example, annual leave, personal/carers' leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees.
||Does not receive paid leave.
Extracted from the Fair Work Ombudsman website www.fairwork.gov.au.
Some laws apply to both the employment and independent contract relationships
Often there is confusion (or incorrect assumption) in regard to what laws apply to employees and or contractors. It is important to understand that there is legislation that apply to both.
A relationship of employment gives rise to several obligations for an employer, including yet not limited to:
The Fair Work Act 2009 (Cth) - this is the major employment legislation that covers most employees (excepting for some state government employees covered under relevant state employment legislation);
- workers compensation insurance to cover injury to workers;
- compliance with work, health and safety laws;
- long service leave, annual leave and parental leave;
- compliance with unfair, unlawful dismissal and adverse action laws;
- compliance with Modern Awards and if relevant, State Awards;
- payment of PAYE/income tax, payroll tax, fringe benefits and superannuation; and
- compliance with anti-discrimination and anti-bullying laws.
The independent contractor relationship is typically governed by the contract between the organisation and the independent contractor and is not covered by employment laws.
Independent contractors need to manage their own business and typically procure their own insurance for potential negligence and also income protection.
In the past, independent contractors were in the spotlight with the potential for exploitation and unfair contracts. This resulted in the introduction of the Independent Contractors Act 2006 (Cth).
This is subsequently supplemented further by the sham contracting provisions in the Fair Work Act 2009 (Cth).
Laws that relate to both Employees and Contractors The following relate to both Employees and Contractors. Examples include, yet are not limited to:
- work, health and safety;
- adverse action claims
- workers compensation (in some cases); and
- superannuation (in some cases).
What are sham contracts?
Sham contracting arrangements happen where an employer attempts to disguise an employment relationship as an independent contracting arrangement. This is usually done for the purposes of avoiding responsibility for employee entitlements.
The Fair Work Act contains sham contracting provisions and employers cannot:
- misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement
- dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor
- make knowingly false statements to encourage or influence an employee to become an independent contractor.
Risks: what if you get it wrong?
Organisations must take steps to become aware of the differences between an employment relationship and an independent contractor relationship. Failing to do so risks exposure to sham contracting and other breaches.
The employment relationship is more heavily regulated than a contractor relationship. This often results in breaching laws by incorrectly classifying an individual as a contractor when at law they are in fact an employee.
If you incorrectly classify an individual as an employee or contractor, you may be liable for:
- superannuation charges, where you have failed to make superannuation contributions for the benefit of the individual either because they are an employee at common law or because they are an ‘employee’ under the extended definition in the Superannuation Guarantee (Administration) Act 1992 (Cth).
- additional payroll tax (including penalties and interest) where you have incorrectly claimed contractor exemptions on payments made to employees (for which there are no exemptions available).
- back pay under a modern award or even an enterprise agreement, where you have incorrectly classified an individual as a contractor. Most non-management employees are covered by a modern award and will have entitlements under the award to a minimum wage, overtime, penalty rates, allowances and leave loading. As well as liability for back pay, there are penalties for breaching modern awards.
- unpaid annual and long service leave, where you have incorrectly classified an individual as a contractor. All employees are entitled to paid annual leave, and may be entitled to long service leave upon reaching the required number of years’ service.
- compensation for unfair dismissal or for other prohibited conduct. Many employees have access to an unfair dismissal regime, and to other remedies where their employer acts to the detriment of the employee. For example, under the Fair Work Act 2009 (Cth), an employer must not take adverse action against an employee because the employee makes a complaint about safety matters affecting the employee’s employment.
The Fair Work Ombudsman
The Fair Work Ombudsman is strongly mandated to ensure that sham contracting and poor contracting practices are eliminated and where necessary, prosecuted in the Courts. Fair Work Inspectors can seek the imposition of penalties for contraventions of sham contracting arrangements. The courts may impose a maximum penalty of over $50,000 per contravention.
A notable recent matter has involved the food delivery start up, Foodora, being accused of sham contracting and worker underpayment by the Fair Work Ombudsman in a case that has been called “unquestionably significant” for the future of Australia’s gig economy.
The Fair Work Ombudsman alleges that upon engaging the workers in 2015, Foodora fell foul of sham contracting laws by misrepresenting the workers as independent contractors, rather than employees of the company.
Despite each worker having an ABN and signing an ‘Independent Contractor Agreement’ with the company, the Fair Work Ombudsman alleges that the workers’ responsibilities and conditions meant the three workers should have been considered employees, and were therefore entitled to minimum wage rates and entitlements as per the Fast Food Industry Award.
It is well known that Foodora has now ceased operations in Australia and many commentators support the view that the Fair Work Ombudsman’s prosecution has been the major contributing factor.
It is important that when an organisation is engaging workers that consideration is given to the appropriate method of engagement i.e: employee or contractor. As indicated in this article, there are many factors to consider. Managing this process correctly will assist to mitigating potential risk to the business and also shows consideration to ensuring the individual being engaged is being on-boarded under the appropriate terms and conditions.
Needing advice and help?
If you would like assistance with understanding the arrangement of work, modern award terms or optimising your workforce, the team of advisors at AB Phillips can
assist you with practical advice and support.
For support and assistance, please contact our team of advisors at AB Phillips, Monday to Friday between 9:00 am and 5:00 pm AEST by phone on 1300 208 828 or email [email protected].