With tighter times there is more pressure on workers to get an Australian Business Number (ABN) to become contractors to get work. ‘Sham Contracting’ is where a worker who is really an employee is working under an ABN as a contractor. The worker may ask to do this for the better pay or the employer may ask for it to reduce the costs and liabilities of employment. As a contractor, you are not able to receive the benefits of an employee such as unfair dismissal as it goes to the contract agreement terms to resolve. But should you be a contractor? And what are the implications for both the worker and the employer if you do but you’re technically not?
What The ATO Says
The ATO has guidance on whether you’re an employee or a contractor. Below are some of those guidances, or click here to go to the ATO website.
1. Control Over Work: An employee is directed by their employer in how the work is to be carried out. A contractor is, per the terms of their contract, able to carry out the work as they see fit.
2. Ability to Subcontract/Delegate: An employee cannot contract in someone else to carry out the work. A contractor has the ability to subcontract the work to someone else or get an employee to do the work.
3. Basis of Payment: An employee is paid on time; or price per unit/item; commission. A contractor is paid to deliver an outcome per the agreement.
4. Equipment, Tools and Other Assets: An employees equipment, tools and other assets are supplied by the employer. The employee may provide most of their own tools but they are paid an allowance or reimbursed the cost of the equipment to do so. A contractor supplies almost all of their own tools to carry out the work. They are not reimbursed or receive an allowance for this cost.
5. Commercial Risk: Commercial risk is liability over the legal reponsibility of the work and repair or cost of any rectifications. An employee takes on little if any of the commercial risk, this is taken on by the employer. A contractor takes on all of the risk subject to the agreement.
6. Independence: An employee is not independent of the business. They work for the business and under the direction of the employer. A contractor is independent of the business with their own business. They can accept and refuse work, negotiate terms of the contract and are only obligated to carry out work that delivers the outcome of the contract agreement.
Consequences Of A Contractor Who Is Actually An Employee
If you are using someone and treating them as a contractor and they are actually an employee, you may
- Be required to pay their supperannuation. This includes any penalties for late payment or legal liability if you are a company director.
- Have to pay for any unpaid Pay As You Go (PAYG) Tax Instalments, including fines, penalties and interest.
- have to pay unpaid Workers Compensation. If the person is injured at work and you have not been paying workers compensation insurance, you could face legal and financial problems.
- Have to pay Payroll Tax on payments. This could include any fines, penalties and interest.
- Have to pay allowances or benefits required under Enterprise Bargaining Agreements or Awards. This could include tool allowances; travel allowances; meal allowances; time and half and double time penalty rates. Plus any superannuation, PAYG Tax and or Payroll Tax on these allowances and benefits.
- Have to accrue or pay for leave entitlments such as annual leave, sick leave, Rostered Days Off (RDO), and long service leave.
The Australian Federal Government has discussed possible additional conditions or tests to be met to determine if a workers is an employee or a contractor. Part of this is the introduction in 2012 of the ‘Taxable Payments Annual Report’ reporting requirements for businesses in the building and construction industry to report on contractor payments to assist the ATO to identify sham contracting.
How Does This Affect You?
The above information should not be relied upon. If you are concerned about whether you are a contractor or an employee, or if you are being asked to get an ABN to work, or you are wanting to put someone on and don’t know if they can be contracted with an ABN, then speak to your accountant; tax agent; and or legal advisor for advice.
~ Damien Foley