Many business owners assume that if they hire independent contractors they are not responsible for providing PAYG withholding, superannuation guarantee, payroll tax and workers compensation. However, you might be surprised to know that some of your “contractors” are actually employees. In some cases even genuine contractors can be treated as if they were employees and entitled to certain benefits.
Correctly classifying the employment relationship can be difficult and there are significant penalties faced by businesses that get it wrong. So we’ve put together a quick guide you can use to determine if you’re dealing with an employee or a contractor. This is general advice only though, make sure you speak to us directly to get advice tailored to your individual circumstances. We’re always happy to take a look at employment contracts before you send them out!
Employee or Contractor? How to know the difference!
Genuine contractors run a business, which means they:
- pay their own income tax and GST directly to the ATO
- source their own clients by, for example, advertising their products or services
- can delegate work to others if they choose without approval from an ‘employer’
- quote for work, including setting or negotiating their own prices
- invoice for work
- maintain a business bank account separate from their own personal account
- pay for their own business insurance such as public liability
If your workers do not meet the above criteria, then they are actually employees, and you should review your employment agreement and their entitlements as soon as possible with a professional!
When can I request an ABN as an employer?
Not everyone needs an Australian Business Number (ABN) and you can only request an ABN from workers if they are genuine contractors.
In many cases, employees in irregular or casual jobs (such as performers, musicians, some consultants and labourers) are asked to get an ABN by employers when they are not eligible for one.
The following things mean an individual is entitled to an ABN:
- Carrying on or starting an enterprise in Australia. Or making supplies connected with Australia’s indirect tax zone
- A Corporations Act company
The Australian Business Register (ABR) identifies and cancels ABNs where there is no entitlement. They are always conducting ABN entitlement reviews, particularly in industries where there are high levels of misuse.
You should always cancel your ABN if your business has been sold, has closed or is no longer operating in Australia. And you should be encouraging any employees who don’t require their ABN to do the same.
This is because many people have been told (incorrectly) by their employers that they “need an ABN” to do the job, in an attempt to treat them as independent contractors.
The reason for this? Contractors can be paid less and miss out on superannuation, and paid leave entitlements that you may be eligible for as an employee.
So make sure you are not requesting ABNs from employees that don’t need them! If you are unsure, make sure you get proper advice from a professional.
For employers struggling to work out if they have correctly classified their contractors as employees, it will be important to review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement. Merely labelling a worker as an independent contractor is not enough if the rights and obligations under the agreement are not consistent with the label.
Every business that employs contractors should have a process in place to ensure the correct classification of employment arrangements and review those arrangements over time. Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.
If you operate a business and engage a worker, you’re responsible for determining whether a worker is an employee or contractor. If you employ workers incorrectly under an ABN you can be penalised.
The long and the short of it is, don’t send out employment contracts without talking to us first! For advice and information on ABNs and contractors, contact one of our advisors today!