The ATO can rule that someone you have engaged as a contractor, is in fact an employee for tax and superannuation purposes, and the consequences can be costly.
PAYG
If your contractors are in fact employees, you will be liable to pay the their entire PAYG withholding tax for their period of employment. Depending on the circumstances and length of employment, the ATO may also impose additional penalties.
Importantly, the Australian Taxation Legislation triggers personal liability for Directors who are responsible for meeting PAYG obligations.
Superannuation
Classifying employees as contractors has even greater consequences under the superannuation legislation. You will be immediately liable for all unpaid superannuation, calculated at 9.5% of their income, plus interest at 10%, an administration fee, and an additional Superannuation Guarantee of up 200%.
It is also important to note that engaging a contractor does not automatically relieve you of the obligation to pay superannuation. If the value of the contract is more than $450 per month you may still have an obligation to pay superannuation. If you engage contractors, it is important to check your superannuation obligations for each contract and review them regularly.
Fair Work Legislation
Contractor relationships are sometimes used by employers to avoid their obligations as an employer. If it is found that you are intentionally misleading or acting dishonestly, you may be liable to penalties under the Fair Work Act of up to $54,000 per contract.
Who is an employee?
The difference between a contractor and an employee can sometimes be a fine line, and the ATO and the courts will often determine that a relationship, despite being defined by the parties as a contractor relationship, is in fact an employee/employer relationship – particularly where questions of personal liability arise.
The relationship itself must be structured appropriately to ensure that the ATO and the courts determine that it is in fact a contractor relationship and not an employment relationship.
- Control and independence
- Equipment
- Risk
- Delegation
Employees are generally required to work specific hours and at a specified location. Contractors on the other hand have control over how many hours they work, when they work those hours and, depending on the nature of the work, the location they perform their work.
If you require your contractors to be on-site at specific times you may be positioning yourself as an employer.
Employers are responsible for providing the necessary and appropriate equipment to ensure that their employees can fully and safely undertake their duties. As a general rule however, contractors are required to supply and maintain their own equipment, tools, computers, telephones, and any other item they may need to complete their work.
In an employment relationship, an employer will accept risk associated with the actions of their employees.
Risk allocation in a contract agreement can be negotiated between the parties, but caution should be exercised – where an employer accepts risk, particularly personal risk, associated with work completed by a contractor, a court is more likely to determine that the parties are engaged in an employment relationship.
Contract arrangements often include clauses that prevent a contractor from delegating their work to another service provider. Caution should be exercised when drafting these clauses, as a complete prohibition on delegation can be construed as an indicator of an employment arrangement.
