The distinction between “employee” and “independent contractor” is crucial for many areas of tax, super and other government obligations. The ATO requires businesses to keep records to support the decision of whether your worker is an employee or contractor and the factors you relied on. To correctly work out whether a worker is an employee or contractor, you need to look at the whole working arrangement including the specific terms and conditions under which the work is performed. An employee works in your business and is part of your business, whereas a contractor is running their own business.

Employment Relationship

The legislation does not define either “employee” or “contractor”. Therefore, the ATO provides the following characteristics to assist in determining the employment relationship:

1. Ability to sub-contract/delegate
2. Basis of payment
3. Equipment, tools and other assets required to complete the work
4. Commercial risks
5. Control over the work
6. Independence

Thus, the worker cannot sub-contract/delegate the work and is paid for the time worked. Your business provides all or most of the equipment and is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work. The worker receives the direction on how to perform his/her duties.

The concept of employment relationship affects the “vicarious liability” area, employee entitlements and tax liability. Generally, an employer is liable for the wrongful acts of an employee provided it has occurred in the course of the employment.

Under the pay-as-you-go (PAYG) provisions an employer is required to withhold an amount from salary, wages, bonuses or allowances he or she pays to an individual as an employee. In addition, the employer is responsible for State payroll taxes, where applicable. The fringe benefit regime stipulates that “fringe benefits” can be only provided to an employee or its associate in respect of employment. Pursuant to the Superannuation Guarantee Act 1992 an employer is liable for a superannuation charge if it fails to provide superannuation contributions for an employee.

An employee share scheme (ESS) allows employees to acquire shares, stapled securities or rights to acquire ESS interests in the company. On the other hand, the personal service income (PSI) rules do not apply to employees. Independent contractors may be required to register for good and services tax (GST).

Recently, in two separate cases, the Administrative Appeals Tribunal (AAT) was considering whether the workers were employees for superannuation guarantee purposes after the taxpayers objected to superannuation excess contribution tax assessments. The Commissioner replied heavily on s 14ZZK of the Taxation Administration Act 1953 (Cth) that stipulates that the taxpayer bears the burden of proving that the assessment is excessive.

In Dominic B Fishing Pty Ltd and FCT the Court had to determine whether crew members on a commercial fishing vessel operated by the taxpayer were employees. A similar argument was in XVQY and FCT where the workers were engaged in a plumbing business as sub-contractors. The AAT ruled in favour of the taxpayers emphasising that each case has to be examined in relation to its own circumstances taking into consideration the total “picture.”

In summary, the status of the employment relationship – whether your worker is an employee or an independent contractor – affects different areas of law. You may face penalties and charges if you incorrectly treat an employee as a contractor and do not meet your obligations. For assistance and advice in this area, call The Quinn Group on 02 9223 9166 or submit an online enquiry here.