Now here's a case study that will make many employer business owners take notice.
The courts recently ruled that a "sub-contractor" engaged by a property maintenance business was actually an employee (and not an independent contractor) over a 12-year period. This ultimately cost the business owner $27,272 (including interest) in Superannuation Guarantee Charges - restitution to the worker covering three years.
The unpleasant court case came about when the (former) worker complained to the ATO that he had not been paid Superannuation Guarantee contributions.
Even though there was no written agreement and he used his own tools and vehicle, the worker was paid a fixed hourly rate and given instructions each day of what jobs to do. The business owner claimed that the worker was engaged as an independent contractor because he (the worker) provided an ABN and was therefore responsible for his own tax, holiday pay, sick leave, workers' compensation and superannuation.
Although the worker was often not supervised, it was found that the business owner effectively had full control of the worker's daily activities, which were discussed in advance of each task. The worker did not provide quotes and was paid a flat hourly rate which did not vary depending upon the task. There was also no evidence of any capacity for the worker to delegate tasks - it was clearly a "master/servant" relationship; an important test in determining contractor or employee status.
Right or wrong, the worker in this case was deemed to be an employee and the business owner was left to pay significant compensation.
When hiring workers for your business, do you understand the difference between contractors and employees for tax and superannuation purposes?
Getting this distinction wrong could compromise your business's ability to meet tax and super obligations, and can mean your workers miss out on employee entitlements. Even more critical, if you mis-classify your workers, you could also also be caught out with penalties and charges.
There is not a single deciding factor to classify a worker as an employee or a contractor. You need to consider the whole working arrangement, including each worker's:
- ability to sub-contract/delegate: can the worker pay someone else to do the work?
- basis of payment: is the worker paid based on an agreed quote they provided?
- equipment, tools and other assets: does the worker provide their own tools and equipment needed to do the job?
- uniforms: is the worker seen to be acting for the employer's business not their own?
- commercial risks: is the worker legally responsible for their work and liable for fixing mistakes or defects?
- control over the work: does the worker decide how to do the work, subject to specific terms in the contract or agreement?
- independence: does the worker operate their own business independently of your client's business?
If you answer no to some or all of these questions about your workforce, you really need to seek further information and advice before hiring, or continuing to treat workers as contractors.
Another thing to remember - if your business is taking on an apprentice, trainee, labourer or trades assistant, those workers are always employees, never contractors.
Apprentices and trainees do a combination of work and recognised training to get a qualification, certificate or diploma. They can be full-time, part-time or school-based and usually have a formal training agreement with the business they work for, which is registered through a state or territory training authority or completed under a relevant law.
In most cases they are paid under an award and receive specific pay and conditions. The work arrangement for apprentices and trainees is employment. You must meet the same tax and super obligations as you do for any other employees of your business.
If you need more information.
If you are unsure about the employment status of your workers or you're concerned you've accidentally classifying employees as contractors, the ATO has a helpful Contractor Checklist.
If it's still unclear to you, then our Advisers can help with advice and a review or implementation of formal employment or contractor contracts.