Your obligations in law vary depending on whether the hire is an employee or an Independent contractor. For example, employees are owed superannuation payments and other entitlements while independent contractors are not. Your obligations may extend to different areas of law including superannuation law, taxation law and employment law.
There are multiple factors which determine who is an employee and who is a contractor. The Courts look at the whole situation and come to a decision based on a few key factors which are set out below.
The factors which determine if a person is an independent contractor or an employee are:
Degree of control over how work is performed. If they perform work under your direction, they are more likely to be an employee. Whereas a contractor is more likely to have a high level of control in determining how work is performed.
Hours of work: Employees generally work standard hours except casuals who can work on a variable casual basis. Whereas an independent contractor can decide their hours of work.
Expectation of work: Employees generally have an expectation of work and contractors are generally engaged to complete a specific task.
Risk: Employees bear no financial risk. Whereas an independent contractor is responsible for their own profitability and if something goes wrong, they are legally responsible for poor work or liability. Therefore independent contractors often take out their own insurance.
Superannuation: Employees are entitled to superannuation payments. Generally, independent contractors are required to pay their own superannuation. There are some situations where independent contractors are entitled to superannuation payments.
Tools and equipment: Employers usually provide tools of the trade (such as ladders, computers, software and tools) or a tool allowance is provided. Whereas independent contractors are required to provide their own tools.
Tax: Employees have their income deducted by their employer. Whereas, independent contractors are responsible for allocating and paying their own tax.
Method of payment: Employees are usually paid regularly (weekly, fortnightly or monthly). Independent contractors send an invoice for payment.
Leave: Employees are entitled to leave, including sick leave, annual leave, personal/carers' leave, annual leave (and leave loading for casual employees). Whereas, Independent contractors do not receive paid leave.
Sham Contracts Employers beware. Disguising an employment arrangement as an independent contractor relationship to avoid employee entitlements could be a sham contract. There are very serious penalties.
"Asking your new hire to get an ABN and putting a term in their contract that they are an independent contractor is not enough, it could put you in breach of the law." Caroline Mense, Principal Lawyer at Legal Enablers said.
Other legal tests: Superannuation, Tax and Payroll
So far this article was from an employment law perspective. The tests for tax, superannuation and payroll are different. We will go through the tests below.
Even if a person is an independent contractor, the superannuation laws can deem the worker to be an employee for your superannuation obligations. The Superannuation Guarantee (Administration) Act 1992 (Cth) could deem a worker to be an employee:
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’
Most States and Territories of Australia deem payments to contractors to be 'taxable wages' and therefore subject to payroll tax, subject to some exemptions. Please note, Western Australia has very different legislation to the other States and Territories.
Summary The correct classification of your staff is important. Wrongly a person as an independent contractor when, in fact they are an employee can pose the following risks:
Superannuation may be owed.
Payroll tax plus penalties and interest may be owed to the Australian Tax Office.
Employee entitlements including Modern Award, Enterprise Agreement or minimum pay rates and penalties for breaches of the Fair Work Act and leave entitlements including leave loading. Back pay and penalties could apply.
Employees are entitled to protections under the Fair Work Act including unfair dismissal and general protections.
For help with the classification of your workers or any other legal questions, please do not hesitate to contact Caroline Mense from our office on (03) 8691 3128 or book a time below.
Legal Enablers is experienced in Employment and HR law and acts for employers.