Contractor or employee? The issue of whether a worker is a contractor or an employee is an old one. In fact, it can be traced right back to the genesis of the labour movement. From a conceptual point of view, an independent contractor operates, and is subject to the risk of running, his or her own business. Independent contractors are engaged by businesses on a limited basis. In contrast, an employee is engaged to perform services for the betterment of the employer’s business. They generally work on a regular basis and are subject to the control of the employer.
However, several government agencies are putting businesses that engage contractors under the microscope. The agencies’ primary objective is to ensure businesses are complying with their obligations in relation to their workers, in particular, ensuring that workers are being correctly classified as employees or contractors.
Leading the charge is the Tax Office. Its 2012 Compliance Program devotes a complete section to “promoting a level-playing field for Australian Business”. Here, the Tax Office states that it has “been targeting contracting arrangements. [Tax Office personnel] visit businesses and review the way they engage their workers, paying particular attention to individual workers who may be common law employees but are being incorrectly treated as contractors”.
The concern here is whether businesses have complied with their various employment tax obligations such as PAYG withholding and the superannuation guarantee. The Tax Office notes that businesses that utilise “sham” contracting arrangements gain an unfair competitive advantage over businesses that go through the rigours of putting people on the payroll. However, the Tax Office cannot dictate how businesses are run and in many cases there are strong commercial reasons why businesses will utilise a contractor rather than employing workers – particularly if the service required is not the employer’s core business.
What are the Regulators Looking For?
Drawing the line between legitimate contracting and arrangements that are likely to attract the ire of the regulatory authorities is often a very difficult one. However, the line of demarcation will not be determined by the intention of either of parties to the contract. It is the circumstances of the arrangement that will be key.
If a regulator chooses to examine your arrangements, it will be looking at traditional factors such as:
- Economic risk
- Who supplies the “tools of trade”
- Method of remuneration
By weighing the above factors, the regulator will determine whether a contractor is in fact an “employee”. The outcome could have a significant impact on you and your contractors.
Businesses utilising contract labour need to be aware that there are extended concepts of “employee” in the payroll tax and superannuation guarantee regimes. This extended definition can mean that businesses that believe they are engaging contractors may, for the purposes of these laws, be utilising “employees”, whatever the terms of the contract both parties have agreed to and whether or not the “contractor” has an ABN.
Businesses engaging contract labour should also consider their WorkCover obligations. WorkCover generally follows similar rules to payroll tax. Consequently, if you have an issue in one area, you are more than likely to have issues in each of the other areas. Shortfalls in superannuation and WorkCover, in particular, can bring significant financial penalties.
Fair Work Australia
In recent Fair Work Australia tribunal cases, the Fair Work Ombudsman identified incorrectly classified workers and in formulating the resulting penalties, focused on entitlements that workers may have missed out on. The Ombudsman ordered significant back payments and penalties. In some cases, the directors and managers of the business were fined for non-compliance with the Fair Work Act. Fines have been up to many hundreds of thousands of dollars.
Compounding the problem for non-complying businesses is the fact that other costs such as payroll tax, superannuation guarantee and WorkCover all have to be paid in the wage adjustments as a result of the Fair Work Ombudsman’s determination.
Given the raft of obligations that cuts across any particular contractor arrangement, the costs for businesses that fail to manage their worker obligations cannot be underestimated. Add to this the possibility of significant historical financial exposure through backdated penalties and it quickly becomes an area where no chances can be taken.
Which Industries are Being Examined?
Further issues will arise for the Building and Construction Industry. New reporting requirements from 1 July 2012 apply in respect of all payments made to contractors providing building and construction services.
The first annual reports of payments made will be required for the year ending 30 June 2013. Non-compliance will increase the risk to businesses in this industry. For instance, if you report a contractor payment without having applied the correct treatment for GST and superannuation guarantee purposes, there will be additional costs once the data is cross-matched by the Tax Office. Failing to apply the correct treatment may also lead to further state taxes being payable upon review.
While the building and construction industry is the only one with specific legislation at this stage, the Tax Office has already constructed a comprehensive audit “hit list” that includes cleaners, security operators, retailers, tourism operators, restaurants and cafés, aged care providers, health care operators, the transport and entertainment industries and those in telecommunications.
How can we get Help?
Firms such as Crowe Horwath offer you easy access to experts in the different taxes and legislation involved. They can work with you to assess risk and develop employment tax compliance strategies, and advise on management of potential
disputes with the Tax Office and other government agencies.
For more information visit their website by clicking the logo below.