With the Gig Economy taking over, and more people looking to become contractors or freelancers, getting your compliance straight can be confusing. You have to ask yourself, when are your contractors not contractors? Who should be paying tax, what tax is required, how does insurance factor in?
It’s a confusing minefield, and if you take a wrong step the consequences could be costly. The label affects tax, super and other obligations and penalties and charges may apply for a mistake.
You can’t just assume that the person you are hiring is a contractor. There are some basic things you can check to make sure.
Some workers will always be employees.
If you have an apprentice, trainee, labourer or trade assistant on your books they will always be paid as employee. This means you, as the employer, are responsible for paying tax, covering their insurances and making super contributions. They can be employed full time, part time or through school based employment, and are usually working toward a qualification
Companies, trusts and partnerships are always contractors.
An employee must be a person, so if you have employed a company or trust to complete the work, or have entered into a partnership, then a contracting agreement exists. This means it is on the other party to the contract to meet all tax and super obligations.
Individual workers
If you are hiring an individual, you have to look at various factors around the terms of their employment to determine whether they are an employee or contractor:
Sub-contract or delegate: an employee is not able to sub-contract or delegate, they must complete the job which they are tasked with themselves. Alternatively, a contractor can delegate part of their task and pay someone else to complete it.
Basis of payment: if the worker is paid for the time that they work with a set rate, whether it be an annual salary or a weekly or hourly rate which is paid regularly, or the worker is payed a commission per each item or activity that they complete, they will be seen as an employee. If you are paying the worker based on a quote that they have provided, whether it’s a quote for a finished product or for cost per hour, then the worker would be considered a contractor.
Equipment, tools and other assets: if you provide the worker with the tools that they require to complete the job, then the worker is an employee. If the worker provides their own tools, equipment and any other items that they may require to complete the job, then the worker is considered a contractor.
Commercial risks: who is covering any insurances? If you are covering any commercial risks, then the worker is an employee, but if the commercial risks are covered by the individual, then they are a contractor.
Control over the work: when the worker is an employee, you have the right to direct how they complete their work, however a contractor has freedom to complete the task in their preferred manner as long as the task is completed.
Independence: is the worker operating independently of your business? If not, then they are an employee.
Labour hire or on-hire arrangements
There is also the possibility of obtaining your worker through a labour hire (or on-hire) firm. These labour hire firms can be called a variety of names, including recruitment services, group training organisations and companies who have registered for on On-Hire Licence in certain states. On an international level, it includes companies who hold a Labour On-Hire Agreement with the Department of Home Affairs which allows them to sponsor a skilled international worker on a Temporary Skill Shortage (TSS) subclass 482 visa on behalf of the company.
If you have obtained your worker through a labour hire (or on-hire) firm and pay that firm for the work undertaken in your business, then your business has a contract with the labour hire firm and they are responsible for collecting and payment of the PAYG withholding, super and FBT obligations.
In simple terms, you hired a contractor, who is an employee of the on-hire company.
An on-hire company is an easy way to control the multilayered government compliance and legalities that are required when running contractors.
To learn more… talk to us… [email protected], book an appointment to discuss or call 02 9407 8700
We look forward to hearing from you.
See how the Australian Tax Office defines an employee and contractor
