Employee v Contractor


Contractor v Employee – Is that worker really a contractor?

In general terms, if a worker is an employee:

  • PAYG withholding applies to salary
  • Fringe Benefits Tax applies to non-cash benefits
  • the employer must make superannuation contributions
  • there could be state payroll tax.

A ‘genuine’ contactor on the other hand should have an Australian Business Number (ABN) which raises other issues such as Goods and Services Tax.

The tax and superannuation guarantee laws are structured in a way that, even if a worker has an ABN, the payer (employer) is still obliged to determine whether the worker is in fact a ‘genuine’ contractor or really an employee.

There have been many court cases on the employee-contractor distinction, and these decisions have determined numerous ‘tests’. The below table sets out the ATO’s approach:

Employee Contractor

Ability to subcontract/delegate:
the worker can’t subcontract/delegate the work – they can’t pay someone else to do the work.

Ability to subcontract/delegate:
the worker can subcontract/delegate the work – they can pay someone else to do the work.

Basis of payment:
the worker is paid either:

  • for the time worked
  • a price per item or activity
  • a commission.

Basis of payment:
the worker is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work.

Equipment, tools and other assets:

  • your business provides all or most of the equipment, tools and other assets required to complete the work, or
  • the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.

Equipment, tools and other assets:

  • the worker provides all or most of the equipment, tools and other assets required to complete the work
  • the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.

Commercial risks:
the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.

Commercial risks:
the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.

Commercial risks:
the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.

Control over the work:
the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.

Independence:
the worker is not operating independently of your business. They work within and are considered part of your business.

Independence:
the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.

Source:
https://www.ato.gov.au/business/employee-or-contractor/difference-between-employees-and-contractors

If you use contract labour in your business, it is worth implementing a checklist approach for use at hiring time which reflects these tests. That way, you can demonstrate to the ATO and others that your business has done its best to comply with a very difficult area of tax law.

For payroll tax purposes, a contractor may be included in your assessable wages, even if they meet the definition of a contractor for ATO purposes. Under the NSW payroll tax legislation, the approach is to only exempt contractors who meet one of the following exceptions:

  1. Services ancillary to supply of goods i.e. less than 50% labour.
    1. Does not apply if materials purchased from the Group.
    2. Where the 50% general rule does not apply, and contract is included for payroll tax purposes, a deduction for materials can be applied per ruling PTA018 by applying relevant % for identified industry.
  2. Contract for services the business does not normally require (i.e. an accountant contracts a plumber to fix the office toilet).
  3. Services normally required for less than 180 days in a financial year (regardless of whether the services
    are provided by contractors or employees)

    • E.g. a ski fields operator offers a maintenance contract by tender repair and maintain various machinery. The contractor is paid a fixed amount to be available for 120 days.
  4. Contracts with a contractor for not more than 90 days i.e. no more than a total of 90 days in a year.
  5. Commissioner’s discretion – if exemptions 1 to 4 do not apply and the contractor offers services directly to the public, they may be exempt.
  6. Contractor has two or more people working for them on the contract (note – support staff like receptionists, bookkeepers etc, generally do not count).
  7. Contract is for a conveyance of goods e.g. delivery company. Please note the owner driver must not be a common law employee, needs to provide their own vehicle, and the primary purpose of the contract must be to convey goods.
  8. Insurance agent – applies to commissions only.
  9. Door to door sales solely for domestic purposes – specific criteria apply.

The threshold in NSW for payroll tax is $750,000. Once your total wages, superannuation, fringe benefits tax and non-exempted contractors exceed $750,000, your business will be required to pay payroll tax of 5.45% on the amount in excess of the $750,000 threshold. Please note that grouping provisions also apply to ensure that entities with common ownership only receive one threshold.

The ATO and the Office of State Revenue are both actively reviewing businesses for compliance with regards to contractors. If you have any concerns after reading this article, please contact our office to discuss your specific circumstances with an accountant. There can be significant savings (i.e. reduced or waived penalties) for voluntarily disclosing non-compliance (as opposed to waiting for a review / audit).