2 vital questions for all employers/businesses:
Are your employees really employees?
Are your contractors really contractors?
Nobody expects you, an employer, to be an expert in tax laws. That’s why we’re here to advise you! However, your legal and tax responsibilities to your employees are very different from your obligations to your contractors. The penalties for wrongly classifying employees as contractors can be severe (e.g. unfair dismissal claims, ATO penalties on employers/directors, Fair Work Act penalties of up to $33,000 per contravention). So it’s vital that you:
a) understand the basic differences between an employee and a contractor; and
b) correctly classify all your workers as employees or contractors.
Note these two key ATO comments:
“An independent contractor typically contracts to achieve a result, whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).”
“A key factor in deciding if a worker is an employee is the degree of control that can be exercised over the worker. If the payer has the right to direct how, when, where and who is to perform the work, the worker is likely to be an employee. These directions may be verbal or in writing, or simply understood between the parties.”
There are other key factors to consider in establishing if a worker is an employee or a contractor. This issue can be complex, so if you’re in doubt about any of your workers, we strongly recommend that you complete the ATO employee/contractor decision tool (http://www.ato.gov.au/content/00095062.htm). The first question is at the bottom of this webpage. It only takes a few minutes to complete for each worker, and it generates a useful report.
Also, watch out for these five common misconceptions that have proved costly to some employers:
1) “I pay my worker’s family trust/company for their work, so she can’t be an employee.” No! If your work agreement is with an individual worker, and you pay their family trust/company for their employment services, then the payment would be viewed as a mere redirection of their salary/wages. Take care when answering the first question of the above ATO employee/contractor decision tool. You need to know accurately if you have entered into an agreement with an individual, or with a trust or company or partnership.
2) “My worker and I have signed a detailed legal ‘contractor’s agreement’, so he must be a contractor.” False! You cannot change the true substance of the work relationship by giving it a different label. All the terms of an agreement, and the actual reality of work performed, need to be considered.
3) “My worker gives me their ABN and a weekly invoice, so she must be a contractor!” No! Many employees have an ABN, which may relate to their separate business activity. If a worker has an ABN, this does not automatically mean that they are a contractor in relation to the work they do for you. You still need to consider the above key factors as discussed in the above ATO decision tool.
4) “I only have to pay super contributions for my employees, not my contractors.” Not necessarily! You need to pay the required super contributions for all individual contractors employed under a contract that is wholly or principally for the contractor’s labour, even if they quote an ABN.
5) “My worker and I agree that he’ll be a contractor, so I’m not at risk.” Look out! Not only are you at risk if your employee changes their mind, but more importantly, you’re still at risk of a review or audit from the ATO, Fair Work Australia, and other government agencies. Even though the employer payroll obligations for employees can be quite heavy, it’s always far better, and far safer, to correctly identify all employees from the beginning of their employment.
In our next newsletter, we’ll explain the key tax responsibilities to your employees, and your key obligations to your contractors. We’ll also explain how you can best reply to common tax queries you may get from employees and contractors.
In the meantime, if you have any queries, please contact us at Leader Accountancy to discuss your situation. We’d be glad to help!