Employee v Contractor? This scenario often rears its ugly head. There are many advantages of each if you are an employer, but there are may MYTHS out there about what it is to classify as a contractor. It is important to get it right there are consequences for trying to disguise the employment arrangement to look like contracting to avoid their PAYG and SUPER obligations.
Being in the bookkeeping industry and specialising in payroll services I come across this one a lot! IN this blog, we go through the top 5 common mistakes we hear about and include an example to ensure you are meeting all your obligations.
FACT V’s FICTION – Lets break it down!
We have heard a lot of different arguments over our years of bookkeeping on why someone is being treated as a contractor, but below are the 5 most common!
What we’ve heard No 1: “They are a contractor because they have an ABN”
The Truth: A worker quoting an ABN makes no difference to whether they are an employee or contractor!
What we’ve heard No 2: “They are a contractor because we only got them to work for a short period while we were busy” (length of job or regularity of work)
The Truth: Whether the work is casual, temporary or only during busy times makes no difference to the determination of whether a worker is an employee or contractor.
What we’ve heard No 3: “They don’t work for us more than 80% of their time”
The Truth: The 80/20 rule is not a factor when deciding between an employee or contractor. It is actually related to Personal Services Income (PSI) (theres another idea for our next blog) and relates to how a contractor reports their income in their own tax return and claims business-like deductions!
What we’ve heard No 4: “Our worker wants to be a contractor, we we are happy with that”
The Truth: A workers preference does not give grounds for your business to engage them as a contractor.
What we’ve heard No 5: “They submit an invoice with their registered business name”
The Truth: Just because they have a registered business name and/or submitting an invoice does not mean that for every job they will be considered as a contractor.
To correctly determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and explore the specific terms and conditions under which the work is being done. We will explore these next!
What are the indicators to be considered!
This table has the main points to ask yourself when trying to resolve the question or employee or contractor
|You control the work they perform||They control when & how they work|
|Recognised as part of your business||Can perform and accept work from others as well as you|
|Payment is in accordance with a contract of employment or relevant award||Paid based on results achieved and invoices|
|You supply them with the equipment and materials to undertake the work||They supply their own equipment and materials to undertake the work|
|They represent your business, you are accountable to the client for their work.||They represent their own business, and are accountable for their work|
The easiest way to determine someones status is by using the Australian Tax Office’s (ATO) employee/contractor decision tool.
The all important example to make it crystal clear!
Dave the roofer – an employee
Dave is told he will been working on the roofing of a local school for the next six weeks.
Dave is required to work from 8am – 4pm, Monday to Friday.
Dave must do the work personally & is paid on an hourly rate.
Dave is supplied with all the tools of the trade.
Dave is not responsible if the work is not to standard, it will be fixed during his work hours.
Dave the roofer – a contractor
Dave has been engaged to do the roofing of a local school.
Dave is required to have the job completed by a set date – the hours he works to get it done during that time is up to him.
Dave is entitled to delegate the work and sub-contract to others to get it completed & is paid on completion of the job for a set agreed amount.
Dave provides his own tools of the trade.
Dave is responsible if the work is not to standard, he must rectify problems at his own cost.
Still unsure watch this video