When hiring contractors, it is important to distinguish whether a person is a contractor or actually considered an employee, as there are certain taxation, superannuation and workers compensation rules attached to hiring employees as opposed to contractors.

Contractor?

A person is a Contractor if:

• They advertise their services to the public at large;

• The person provides their own tools of trade;

• The person sets their own hours of work;

• The person has a high degree of discretion in how the work is to be performed;

• Has delegation powers to appoint another person in their place;

• The contract specifies the outcomes to be delivered;

• The contractor is paid on performance and delivery of outcomes;

• The contractor works and takes all the risk for the profit and loss of the business;

• Does not receive his or her incomes from predominantly one source (80/20 rule- ATO);

• Provides an Australian Business Number (ABN);

• Can the business obtain a Personal Services Business Determination from the ATO which requires the business or person to pass up to 4 different tests; and

• The contractor is free to accept or refuse work.

Employee? 

A person is more likely to be deemed an Employee where:

• The person is remunerated by way of salary or wages;

• The person is entitled to annual, sick or long service leave;

• The person is employed for a set purpose and cannot change his or her duties as they    please;

• The person is supplied with the equipment and tools to perform their duties;

• The business commercial risk is borne by the employer; and/or

• The employee has the obligation to obey the lawful commands of their employer.

Implications

If the person is considered an Employee, then the consequences will be:

• If the person has not been paid, the Australian Taxation Office (ATO) may claim back unpaid Pay As You Go (PAYG) Tax from you;

• GST input credit can be claimed back by the ATO;

• You will be obligated  to make payments towards superannuation, annual lave, sick leave and long service leave (if a contract is wholly or principally for labour, then the client will have to make super contributions even if an ABN is provided); and

• You may be held responsible for the actions of the deemed Employee and Workplace Health and Safety/ Work Cover can claim back unpaid insurance premiums from you

Have you considered Personal Services Income (PSI)?

When hiring contractors, it is also important that you consider the whether the Income earned by the Contractor is subject to Personal Services Income Rules. These rules do not apply to PSI that is earned in the course of conducting a Personal Services Business.

The Contractor is conducting a Personal Services Business if:

• The activity that earns the Income satisfies the Results Test, or

• 80% or more of the PSI in an income year does not come from one client and one of the other three Personal Services Business tests are met:

  • the unrelated clients test,

  • the employment test,

  • the business premises test, or

  • an ATO determination confirms that a Personal Services Business is being conducted.
    If the Income earned by the Contractor is not from conducting a Personal Services Business, then there are three main implications:

• The PSI will be treated as Income and it must be included in the Contractors individual Income Tax Return;

• If the PSI income is earned by a company, partnership or trust, then it must pay the contractor the PSI as salary or withhold tax on PSI and pay it to the ATO; and

• Claims for deductions may be restricted.

Are you breaching the ‘Sham Contracting’ provisions?

You should also be fully aware of S 900 of the Workplace Relations Act 1996 – the “Sham Agreement” provision. A breach of this provision occurs if you attempt to disguise a clear Employer/Employee relationship, as an Independent Contractor Agreement.

It is possible to breach this provision by:

• Intentionally disguising a persons employment, or an offer of employment, as an Independent Contractor Agreement;

• Dismiss, or threaten to dismiss an Employee for the sole or dominant purpose of re- engaging in the person as an Independent Contractor; and

• By knowingly making a false statement for the purpose of persuading an Employee to become an Independent Contractor.

_______________________________________________________________________________________________________________________________________________________________

For more information, please contact Gavin McInnes on 07 3367 8681 or gmcinnes@grmlaw.com.au.

 The information contained in this article is general in nature and cannot be regarded as anything more than general comment. Readers of this article should not act on the basis of this comment without consulting one of GRM LAW ‘s legal practitioners who will consider their particular circumstances.

Expertise

GRM LAW has a wide range of experience assisting companies in all aspects of business, corporate and IT law.

Not only will you find that GRM LAW is likely to have assisted someone in your exact situation, but you’ll find that a GRM LAW lawyer can distill a complex legal issue into a set of actionable options for you to consider.