Myth or fact -

Are your contractors really employees?

Sally Preston

Many businesses engage workers as “contractors” because it seems simpler. But calling someone a contractor does not make the arrangement a genuine independent contracting arrangement.

Why classification matters

·       PAYG withholding

·       Superannuation guarantee

·       Payroll tax

·       Workers compensation

·       Leave and employment entitlements

·       Penalties, interest and back payments if the classification is wrong

What changed?

The High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek clarified that, where the parties have a comprehensive and valid written contract, the character of the relationship is determined mainly by the legal rights and obligations in that contract. Labels such as “contractor” or “consultant” are not determinative.

Employee or contractor indicators

☐ Is the worker serving in the business of the engager or operating their own business?

☐ Who has control over how, when and where work is performed?

☐ Is the worker paid for time or for a contracted result?

☐ Can the worker delegate or subcontract the work?

☐ Who bears commercial risk?

☐ Who provides tools, equipment, insurance and systems?

☐ Does the written contract match the legal and practical arrangement?

Superannuation can still apply

Even where a worker is not a common law employee, superannuation obligations may still arise for certain individual contractors, particularly where the contract is principally for that person’s labour. This needs separate review.

Common myths that can lead to mistakes

There are several common assumptions that can cause businesses to misclassify workers. An Australian Business Number (ABN), registered business name, invoice, or contract label does not automatically make a worker an independent contractor. Industry practice and worker preference are also not enough. The question is whether the legal rights and obligations support a genuine contractor relationship.

It is also important not to confuse contractor classification with the personal services income rules. The 80/20 rule is relevant to how a contractor may report their own income and deductions, but it is not the test for whether a business has engaged an employee or contractor.

Payroll tax should be considered separately

Payroll tax has its own rules and should be reviewed separately from income tax and superannuation. Payments to contractors may be treated as taxable wages if the arrangement is a relevant contract, even where the contractor is genuinely operating an independent business.

In Queensland, there are specific contractor exemptions that may apply, including exemptions connected with the number of days services are provided, whether the services are ordinarily required by the business, whether the work is performed by two or more people, and whether the services are ancillary to the supply of goods. Businesses should keep sufficient records to support any exemption claimed.

Workers' compensation is another risk area

Workers compensation also needs to be considered. Employers are generally required to insure employees against work-related injuries, and some contractors may need to be included depending on the applicable workers compensation rules. Genuine independent contractors will often manage their own insurance, but this should not be assumed without checking the arrangement.

Need help?

Smart Solutions Tax Advisory can assist with tax and super classification reviews for contractor arrangements.

Disclaimer: This article contains general information only and should not be relied on as tax, legal, employment or payroll tax advice.

References / Useful links

ATO contractor employee: Difference between employees and independent contractors | Australian Taxation Office