They have an ABN, a business name, are registered for GST, you pay them a higher rate, they operate through a corporate structure and they even have a signed written contract; they are obviously a contractor right? Not necessarily!
These are common incorrect assumptions made by business owners when considering if their worker is an employee or a contractor.
How do you determine the difference?
An employee works in your business and is part of your business, whereas a contractor is running their own business. How the relationship is perceived by the public is a good indication; are they representing themselves or your business? Past Tax Office rulings have placed considerable weight on whether the employment contract is seen as a “contract OF service” as opposed to an independent contractor arrangement which is a “contract FOR service”.
Below are general characteristics a contractor exhibits, however a holistic view is a must when assessing an employee vs contractor relationship. It’s important to note there is no strict formula to determining an arrangement, it is not a matter of possessing one or half the criteria to determine the relationship. Each criterion must be tested and a conclusion reached with consideration of all factors.
The degree of control that can be exercised over the worker is generally limited under a contractor arrangement, with the contractor having the freedom in the way the work is done subject to specific term in any contract or agreement. The employer forfeits the right to direct how, when, where and who is to perform the work.
The worker is free to sub-contract/delegate the work and pay someone else to do it.
Basis of Payment
The worker is paid for a result achieved based on the quote they provided.
The worker takes commercial risks with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
Integration and organisation
The worker operates on his or her own account and can be seen as operating independently. Another perspective is that a contractor would have their own goodwill and would not be adding goodwill to the employer.
The contractor provides most of the equipment, tools and other assets required to complete the work. The contractor does not receive an allowance or reimbursement for the cost of the equipment, tools and other assets.
What are the consequences?
The perceived benefits of classifying an employee as a contractor come with high risks. Naturally if the worker you’ve classified as a contractor is an employee, then the PAYG withholding, leave entitlements and superannuation guarantee obligations fall with the employer. Other obligations which may arise are Workers Compensation and Payroll Tax issues and don’t forget the significant interest and penalties!
It is very important to get this right. Ensure that those who are making decisions about whether a worker is an employee or contractor are well educated. Speak to your advisor at NKH should you need any assistance.