This is a question we deal with on a regular basis and it’s something the ATO is making harder and harder for businesses to get around. The trades and services area is an area this is an issue, hence the new requirement to advise the ATO of any payments made to contractors each year in the construction industry.
In some cases, this is very clear cut, but in others there is a grey area. The ATO has a lot of guidance including some decision tools which we will include links for below. We’ve decided to keep it a bit more practical for this blog.
What are the basic things that determine an employee from a contractor?
Firstly, if you are paying someone predominately for labour, it’s more than likely they will be an employee, regardless of what they put on their ‘invoice’. If they are providing only basic hand tools, if they are being paid by the hour, carrying your business card, introducing themselves as from your business and wearing your shirts/uniform again, they are more than likely an employee.
Other factors include:
- Instruction on where to go/what jobs to do – if you are telling them what to do when and not giving them choice on their schedule this leans towards an employee
- Do they have the ability to delegate work to others outside of the business (e.g. Get their own workers in)
- Who is responsible for the cost of fixing any defects? E.g. Do they bill you their time to go back to fix?
- Are they paid for a result? E.g. A set amount to complete a job no matter what the time taken. Who takes the risk?
- Are they advertising their services to the public in general? The ATO note that this does not include a tradesman who rings his contacts in the industry when he needs work.
Some people may tell you if you engage workers through a company or trust structure it gets around the need for them to be an employee. The ATO advice on this is that they will look at the substance of the arrangement and ‘look through’ any entities set up to try to avoid engaging as an employee.
It’s also important to remember that each relationship needs to be looked at on its own merits. Someone can be an employee for 2 businesses and a contractor for another all at the same time.
What are the risks?
Well they all lie with the employer and predominately lie around unpaid superannuation, unpaid workcover (although in many situations you are still required to pay this for contractors) and fines for failing to withhold PAYG WH. Payroll tax can also be an issue if you have a large payroll.
Our advice to clients is to try to set things up correctly from the outset, but if you are in a situation with workers who really need to be moved over to be employees start planting the seeds and making them aware things will need to change. It can take time and you want to avoid losing good team members if you can.
Ensure you check any relevant industry awards (https://www.fairwork.gov.au/awards-and-agreements/awards ) to ensure rates are in line where necessary.
In most cases, we find that workers don’t have as much of an issue with it as the employers perceive. It might take working in a small pay rise in to keep them happy, but once they get a tax refund as opposed to their usual bill at the end of the year there are rarely any more complaints.
This is general information only. Always seek individual advice from your tax and/or financial advisor for your specific situation.