Businesses which engage contractors should be aware of unwittingly getting caught by the Australian Taxation Office (ATO). If an independent contracting arrangement is found to be an employment relationship under the ATO’s rules, the business will be liable to pay superannuation and PAYG withholding tax to the ATO (note that there are other instances where a business can be liable to the ATO for PAYG withholding tax for contractors) – these payments cannot be sought from the contractor. In addition, the business may also be liable for annual leave, long service leave, personal leave, redundancy pay, minimum wage and other benefits.
To avoid the risk, the business should consider the distinction between an employee and an independent contractor. The difference is often not obvious and there is no one defining factor. The ATO’s current guidelines to determine an employee versus contractor are:
| Employee | Contractor |
| Ability to subcontract/delegate:
The worker cannot subcontract/delegate the work – ie. they cannot pay someone else to do the work. The worker works at the direction of the business. |
Ability to subcontract/delegate: The worker can subcontract/delegate the work – ie. they can pay someone else to do the work. |
| Basis of payment
The worker is paid either
|
Basis of payment:
The worker is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work. |
Equipment, tools and other assets:
|
Equipment, tools and other assets:
|
| Commercial risks:
The worker takes no commercial risks. The business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. |
Commercial risks:
The worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work. |
| Control over the work:
The business has the right to direct the way in which the worker does their work. |
Control over the work:
The worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement. |
| Independence:
The worker is not operating independently of the business. They work within and are considered part of the business. |
Independence:
The worker is operating their own business independently of the business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work. |
The High Court recently considered these matters and in effect held that where a written contract exists, whether a person is an employee or a contractor is determined by how the written contract regulates the relationship between the parties (regardless of what the arrangement is called)[1].
The ATO is currently reviewing who qualifies as an employee for superannuation purposes in light of these High Court cases. The ATO anticipates releasing updated guidelines in October 2022.
Have a question regarding your contractor agreement or arrangement? Contact us at 03 9111 0078 or email us at info@scottlegal.com.au for your legal needs.
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[1] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HAC 1; ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.
