For tax and employment-related reasons, distinguishing your worker as an employee or independent contractor can be a difficult yet vital necessity. The below purposes all require a different definition of contractors and employees, entitling the worker to different tax benefits and presenting them with varying obligations.
Employee or Contractor for Superannuation Guarantee ‘SG’ Purposes
Employers are required to provide quarterly SG support to eligible employees, generally paid at 9.5% of the employee’s ordinary time earnings. But is the worker an employee or a contractor for SG purposes?
Employee is defined under the Superannuation Guarantee (Administration) Act 1992 to have its ordinary meaning under common law; meaning if a person works under a contract that is wholly or principally for the labour of the person, that person is an employee of the other party to the contract.
Further, notably, in a tax ruling, the Australian Taxation Office (ATO) noted that the ordinary meaning of employee further should mean that the individual worker is remunerated for their personal labour and skills, that the individual has no right to delegating work (must complete the work personally) and is not paid on a result or task by task basis; as are atypical features of an independent contractor.
Common Law Employee? Yes or No
Now that the meaning of common law employee is understood, it is essential to understand if your worker is an employee at common law, otherwise termed as a ‘common law employee’. The meaning of common law employee has evolved over the years through a number of court decisions and so determining who a common law employee is ‘factually dependant’ and often considers several factors. In one matter before the court, a Judge held that it is necessary to make an objective assessment of the nature of the relationship a worker has with their employer/work provider, in order to decide their status as an employee or independent contractor. This is often referred to as the ‘totality of the relationship’.
Don’t Be Tricked by the ABN
One factor that is considered to determine a worker’s status is the worker’s holding of an ABN. This is an significant, yet importantly, not a determinative factor in classifying a worker as a common law employee.
Some businesses or employers often coerce or pressure a worker to obtain an ABN in the hope it will classify their worker as an independent contractor and allow for them not to be subject to providing the Superannuation Guarantee and other taxation obligations to an employee. However, the totality of the working relationship and arrangement may dictate that holding an ABN does not make the worker an independent contractor, as they better align to be an employee with the relevant criteria.
The following is a consideration of the relevant criteria used as factors to determine a worker as either an employee or independent contractor.
Factors Determining a Worker’s Status
This factor asks who controls the way work is performed. For an employee this means that the employer controls and dictates tasks and when or how the employee is to carry out work. For a contractor however, this means they decide how to perform their work and may even delegate work to other subcontractors or agencies. Generally, work is performed by a contractor on a task by task basis subject to the conditions and terms of a contract or agreement.
Integration in the Work Provider’s Business
This factor means looking at how the worker is integrated in the work provider’s business; are they separate or working for the company? For example, an employee would wear a uniform, have their training provided by the employer and perform any reasonable duties asked of them as a matter of vitality. Contrastingly, an independent contractor is operating their business as a separate business to the work provider and they are free to accept or reject work from elsewhere that is not that of their current work provider. Further, a contractor performs the services and duties contained within their contract and do not have to perform reasonable duties outside of it, should a work provider request it.
If a worker bears a commercial risk in being employed or contracted to work, then they are often an independent contractor; being legally liable for risk or defects in their work. Comparably, an employee is not legally liable and it is the responsibility of the employer/work provider to amend any defects in work.
Basis of Payment
If a worker is paid a set amount or a commission, they are generally an employee whereas an independent contractor is generally paid by a quote they have provided.
Equipment, Tools and Other Assets for Work
This factor is straightforward in that generally, employees have their equipment and tools necessary for a job’s completion provided for by their work provider. Dissimilarity, an independent contractor pays for these themselves and do not have any allowance for these assets as an employee may.
If the worker is expected to incur their own costs in relation to work performed, they are generally considered an independent contractor, whereas an employee is reimbursed or granted an allowance for expenses incurred whilst employed.
Delegation of Work
An employee cannot generally pay another person to do their work for them; they are contracted to perform the work personally. An independent contractor on the other hand is paid to provide a result or completion of a task, meaning he or she can implement any of their own staff or employees to assist them, delegating work to others.
A worker who is considered an employee is generally appointed or recruited by an employer by an agency or through advertisement, whereas an independent contractor is likely to advertise their services to the general public at large and is more likely to have the employer ‘come to them’, as opposed to the other way around.
Finally, the work relationship’s termination is a factor determining who is an independent contractor or employee. An employee can be dismissed as subject to State and Federal laws whereas an independent contractor’s termination is dictated by a contract or is dismissed at the completion of a set job or task.
These factors can be confusing to get one’s head around but in essence infer that whatever criteria (contractor or employee) is the majority for the worker in question, they are thereby an employee or contractor as per the criteria fulfilled. Note that for specific purposes, the criteria may differ i.e. for PAYG Withholding and Fringe Benefit’s Tax and so it is important to seek professional advice to ensure that you are making appropriate decisions and taking appropriate action for you circumstances.
For professional advice when it comes to navigating employee vs independent contractor matters and related actions, contact the team at The Quinn Group on 02 9223 9166 or submit an online enquiry.