I have hired a contractor. Yippee. I just pay their invoice – Right? Wrong …
Contracting is a well-known and often used alternative to the traditional employee / employer relationship. A contractor can be engaged directly as a natural person, through a trust, partnership or company, or through a labour hire agency.
When engaging an individual (sole trader) as a ‘contractor’; the contractor may be deemed to be an employee and this then invokes a range of legal obligations – and liabilities. Simply calling an individual a ‘contractor’ on paper, or the fact that they have an Australian Business Number (ABN) or a registered business name, does not automatically make the individual a contractor.
When hiring individuals as contractors (sole traders), you may be caught by legislation which deems them employees for the purposes of that legislation. In this regard, one needs to consider PAYG withholding, Superannuation, payroll tax and worker’s compensation legislation.
Generally, PAYG withholding does not need to be withheld from payments to an individual contractor if the individual is genuinely a contractor. The relevant test for determining whether an individual is an employee for PAYG withholding is the common law test. To help you work through this you can use the employee / contractor decision tool available on the ATO website. This is irrespective if the individual has supplied an ABN or not.
NOTE: PAYG does not need to be deducted if you are making payments to a partnership, trust or company, provided that entity provides an ABN and the arrangement is not a sham. Contractor individuals may enter into a PAYG withholding arrangement with the principal client to withhold PAYG on payments to them, but it is not compulsory to do so.
The Superannuation Guarantee (Administration) Act 1992 (Cth) (SG Act) requires you to make superannuation contributions for employees. This includes both employees at common law and any persons who are included by the extended definition of ‘employee’.
The definition is ‘If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract’. The extended definition is intended to extend beyond the traditional employment relationship and include independent contractors who principally provide their own labour to meet obligations under a contract.
The ATO considers that an individual works under a contract that is ‘wholly or principally for the labour of the person’ – and is, therefore, a deemed ‘employee’ – where the individual is remunerated (either wholly or principally) for their personal labour and skills, the individual must perform the contractual work personally (there is no right of delegation) and the individual is not paid to achieve a result. This extended definition of ‘employee’ means that, if you engage an individual as a contractor, you may need to pay superannuation contributions for their benefit, even if the written contract with them does not provide for this and even if they use an ABN.
For payroll tax, in most States and Territories, there are now specific contractor provisions which (subject to certain exemptions and concessions) deem payments to contractors to be part of ‘taxable wages’ which are subject to payroll tax. Available concessions and exemptions should be reviewed in each jurisdiction in which labour performs services.
The contractor provisions capture all payments to contractors as part of an employer’s taxable wages regardless of whether the contractor is an individual, or is engaged via a company or trust structure. Western Australia is the only State whose payroll tax act is not in line with the other States and Territories on the issue of contractors. Western Australia has not extended its payroll tax system to specifically include payments to contractors. Payments to sole traders who are contractors will only be caught in Western Australia where the persons to whom the payments are made are, ‘in substance’, employees.
Under workers compensation legislation (which is different for each State), you may be required to take out workers compensation insurance for individuals who you engage as contractors. Workers are still eligible for workers’ compensation even if the employer is uninsured or under-insured. Compensation for the worker will be paid and then recovered from you. Significant penalties for failure to have workers compensation insurance will also apply. It is in your best interest to cover contractors.
In the case Freestone v Morris & Partners Pty Ltd,  AIRC 223, the company claimed that a woman who performed office duties, including bookkeeping, was a contractor. When the woman’s engagement was terminated, she sought compensation because she had not been given the required or statutory notice of termination. The company opposed the claim saying that she was not entitled to notice as she was not an employee. The company argued that the woman had no written contract, they were issued with invoices on a monthly basis via her registered business name, and she operated various other businesses. The Australian Industrial Relations Commission found that she was, in fact, a part-time employee. Some of the factors that were considered were: she did not advertise her bookkeeping duties to the world at large nor did she maintain separate business premises. She was required to work under the direction of one of the business owners, she did not provide her own tools or equipment and she could delegate or subcontract her work. She was also paid hourly and not based on completion of tasks.
The above is a typical example of how you may hire what you believe is an independent contractor, when in fact under the common law they are found to be an employee. This means a liability for PAYG Withholding, Super Guarantee as well as all the liabilities associated with employment – paid leave, notice periods as well as inclusion into payroll tax and workers compensation calculations.
If you need help to ensure that you know the differences between employees and contractors and other key steps to hiring, join Jo and Gillian at their next workshop on Saturday 10th June at 9.30am and avoid getting it wrong.
Numbers, Made Simple