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Employee or contractor – what’s the difference? And why you could be fined if you don’t do it the right way

Employee or contractor – what’s the difference? And why you could be fined if you don’t do it the right way

By Emma Heuston, Founder & Principal Lawyer, The Remote Expert

Is your team member an independent contractor or an employee?

Get it wrong and you can be fined up to $63,000 for sham contracting arrangements AND face further penalties for failing to meet PAYG withholding requirements and a superannuation guarantee charge.

But I hired an Independent Contractor?

Even if you think you hired an independent contractor to take advantage of the gig economy and keep costs like workers compensation insurance and superannuation down, you might actually have an employee on your hands.

Say what?!

In Australia, the Australian Tax Office (ATO) have a contractor / employee decision tool to help you assess whether your team member is an employee or contractor.

The ATO says, “an employee works IN your business and is part OF your business. A contractor is running their own business”.

How do I know whether I have hired an employee or a contractor?

Find the ATO decision tool here.

 And the ATO summary of the 6 factors used to determine if a team member is an employee or contractor here

In summary:

  •  a contractor retains control over the work and is able to set their own hours, delegate and operate their own business independently. They also generally own their own tools and take the commercial risks if the work goes wrong.

  • an employee cannot delegate work and is paid for the time worked using equipment mostly provided by the employer.  The employee also benefits from insurance and superannuation.

When an independent contractor is treated as an employee for superannuation purposes

Just to confuse matters further, you can hire a contractor but STILL have to pay them superannuation.  Yes really! 

Why?

Even after determining you have a contractor rather than an employee, some contractors are treated as employees for the purposes of superannuation.

The Superannuation Guarantee (Administration) Act 1992 (SG Act) has a test:

  • a contractor is an employee for the purposes of superannuation where they work under a contract that is wholly or principally for the labour of the person”

  • the contractor is paid for their personal skills (for example they are a book keeper or accountant) and must perform the work personally (not delegate); and

  • contractor’s are paid for their personal labour and skills not a result.

Note also that if you pay a contractor $450 or more (before tax) in a calendar month you have to pay superannuation in addition to their other remuneration.

Sham Contractors

The Fair Work Act 2009 (Act) contains sham contract provisions. The reason for these is to stop employers who try and create a contractor agreement to avoid paying employee entitlements.

If your contractor is deemed to be an employee and the contractor agreement a “sham agreement”, you might be liable for back pay of entitlements for leave and superannuation.

Wonder how bad this can get? Check out these cases where the Court has held sham contracts existed:

Fair Work Ombudsman v Happy Cabby Pty Ltd [2013] FCCA 397 

A company that operated buses hired 7 drivers on a sham contracting arrangement, even though they were employees.

In addition to underpaying the drivers award rates by $26,082.22 Happy Cabby was also ordered to pay fines of $252,120 and the director and company secretary of Happy Cabby was ordered to pay $47,784 in fines.

The Director of the Fair Work Building Industry Inspectorate v Linkhill Pty Ltd (No. 9) [2014] FCCA 1124 

Over a period of 3 years, 10 workers were hired as building contractors when they should have been hired as employees.

The Court held that the employer did not meet annual leave, superannuation, travel allowance, meal allowance, overtime, weekend penalty rates and redundancy entitlements under the Act.

As a result the employer was ordered to pay $313,500 in fines.  

Err on the side of caution

 As you can see the employee v contractor question is a minefield.

If you aren’t sure or there are grey areas, err on the side of caution and treat your team member as an employee. That way you can’t get in trouble for failing to meet ATO requirements.

Next Steps

If you need to talk through your circumstances, get in touch here. I offer free discovery chats to get to the bottom of the employee v contractor question.

If you have worked out if you have an employer or contractor I have agreements available at my website: 

  • The Employer Agreement (award) is here plus the Individual Flexibility Agreement is here.

  • The Employment Agreement (non Award) is here.

  • The Variation to Employment Agreement is here.

  • The Contractor Agreement is here.

 Finally – if you need to ensure your employees have a safe workplace and protect yourself in that regard, our Interactive Work Health and Safety Checklist is here

About Me 

I am the Founder of the Remote Expert and a lawyer with 19 years experience. I am also an author and former remote worker.  I am passionate about remote work and ensuring employers get it right so it works out as it should for employers and employees. The more remote work success stories we have out there the more our businesses will have loyal employees and the more regional areas and employees with responsibilities outside of their jobs will benefit.

Read more about me here or connect with me on LinkedIn here.