Employee or Subcontractor

Employee or Subcontractor

Employee or Subcontractor

The Australian Tax Office (ATO) is targeting employers who engage “Sham Contractors”. These employers incorrectly engage employees as contractors to falsely lower their labour costs and avoid their pay as you go (PAYG) withholding and super guarantee responsibilities. The ATO is carrying out audits on businesses that report high Contractor payments on their income tax returns to ensure that the payments are being made to bona fide contractors and not employees disguised as contractors.

What's the difference between an employee and a subcontractor?

It's important that you know the difference as there are different obligations for each worker. The simplest way of working it out is by using the test questions used by the Australian Tax Office (ATO) as follows:.

Employee

If you answer yes to some or all of these statements it is likely that an individual is an employee. If they:

  • are paid for time worked;
  • receive paid leave (for example, sick, annual or recreation, or long service leave);
  • are not responsible for providing the materials or equipment required to do their job;
  • must perform the duties of their position;
  • agree to provide their personal services;
  • work hours set by an agreement or award;
  • are recognised as part and parcel of the payer's business; and
  • take no commercial risks and cannot make a profit or loss from the work performed.

If a worker is an employee, the payer must withhold an amount from any salary, wages, commissions, bonuses or allowances they pay to the employee. The payer determines the amount to withhold using the tax tables published by the ATO and information provided by the employee on their Tax file number declaration (and Withholding declaration if applicable).

An employer may also have obligations under fringe benefits tax and the superannuation guarantee laws.

Independent contractor

An independent contractor is an entity (such as an individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor:

  • is paid for results achieved;
  • provides all or most of the necessary materials and equipment to complete the work;
  • is free to delegate work to other entities;
  • has freedom in the way the work is done;
  • provides services to the general public and other businesses;
  • is free to accept or refuse work; and
  • is in a position to make a profit or loss.

If a worker is an independent contractor, a payer is required to withhold an amount from payments to them only where the contractor:

  • has entered into a voluntary agreement with the payer to have amounts withheld;
  • provides their work or services for a client of the payer under a labour hire arrangement; or
  • has not quoted their Australian business number (ABN) to the payer.

In some cases the superannuation guarantee laws may apply to payments for work or services by an independent contractor.

If you engage a contractor ensure that you obtain a Tax Invoice for the work performed. The Tax Invoice should have the following information displayed clearly:

 

  • the words - “Tax Invoice” and the Invoice number;
  • the contractor’s ABN;
  • the legal trading name of the contractor;
  • the date of issue of the Invoice;
  • the purchasers identity including name & ABN;
  • a description of the work performed;
  • the cost of the supply, the GST amount if applicable, and the total cost including GST

 

For an example of a standard tax invoice please go to the ATO website: http://www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/48360.htm&page=4&H4

If you are unsure of whether your workers are employees or contractors or you would like additional information please contact our office.

Is your worker an employee or a contractor checklist:

Factors to consider

Employee

Contractor

Control over work

The employer has an implied right within industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit.

A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their own discretion.

Independence

An employee performs work for the employer in accordance with an employment contract.

A contractor performs services as specified in a contract with the payer and provides additional services only by agreement.

Payment

Payment is often based on the period of time worked, but an employee can also work on 'piece rates' or commission.

Payment is dependent on the performance of the contract services.

Commercial risks

An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee.

A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense.

Ability to delegate

An employee performs the work personally and generally cannot subcontract the work to someone else.

Unless otherwise specified in the contract, a contractor can subcontract or delegate the work.

Tools and equipment

The employer, except when specifically agreed otherwise, usually provides tools and equipment.

Generally, a contractor provides their own tools and equipment.