Sham contracting is rife in many industries and it comes about generally through misunderstanding and misinformation. And sadly, the decision making isn’t always clear cut, but truth is, it is easier than many would have you think. Getting it right might mean a big difference in your liability to the tax man and other Government regulators.
The BotBooks team at Accross is well equipped to help you make the right call.
Here’s a few questions direct from the ATO website to help guide you.
Myth: If a worker has an ABN they’re a contractor.
Fact: Having an ABN makes no difference to whether a worker is an employee or contractor for a job.
Businesses sometimes request or pressure a worker who is an employee to obtain an ABN in the belief this will make the worker a contractor. Often these businesses attempt to disguise the employment arrangement and make it look like contracting to avoid their PAYG withholding and super obligations.
If the working arrangement is employment, an ABN will not make the worker a contractor.
Myth: Everyone in my industry takes on workers as contractors, so my business should too.
Fact: Just because other businesses treat workers as contractors doesn’t mean they have got it right.
Ignore common industry practice when determining whether your worker is an employee or contractor.
Myth: Employees can’t be used for short jobs or to get extra work done during busy periods.
Fact: The length of a job or regularity of work makes no difference to whether a worker is an employee or contractor.
Both employees and contractors can be used for:
- casual, temporary, on-call and infrequent work
- busy periods
- short jobs, specific tasks and projects.
Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.
Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and can change how a contractor:
- reports their income in their own tax return
- claims some business-like deductions.
It’s not a factor a business considers when they work out whether a worker is an employee or contractor.
Myth: My business has always used contractors, so we don’t need to check whether new workers are employees or contractors.
Fact: Before hiring a new worker, you should always check whether the worker is an employee or contractor by examining the working arrangement.
Unless a working arrangement (including the specific terms and conditions under which the work is done) is identical to a previous arrangement you’ve already checked, the outcome could be different.
Hiring workers without checking the working arrangement could mean the business is incorrectly treating all future workers as contractors when they are employees.
Myth: If a worker has a registered business name, they’re a contractor.
Fact: Having a registered business name makes no difference to whether a worker is an employee or contractor.
Myth: If a worker is a contractor for one job, they will be a contractor for all jobs.
Fact: The working arrangement and specific terms and conditions will determine whether a worker is an employee or contractor for each job. A worker could be an employee for one job and a contractor for the next job.
Myth: My business should only take on contractors so we don’t have to worry about super.
Fact: Businesses may be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the person’s labour, you have to pay super contributions for them.
Myth: Workers used for their specialist skills or qualifications should be engaged as contractors.
Fact: If a business takes on a worker for their specialist skills or qualifications it doesn’t automatically mean they’re a contractor.
A worker with specialist skills or qualifications can be either an employee or contractor depending on the terms and conditions under which the work is done.
Myth: My worker wants to be a contractor, so my business should treat them as one.
Fact: Just because a worker has a preference to work as a contractor doesn’t mean your business can engage them as a contractor.
Whether a worker is an employee or contractor is not a matter of choice, but depends entirely on the working arrangement and the specific terms and conditions.
If you give into pressure and agree to treat an employee as a contractor, you can face penalties and charges for not meeting your tax and super obligations.
Myth: If a worker submits an invoice for their work, they’re a contractor.
Fact: Submitting an invoice for work done or being ‘paid on invoice’ doesn’t make a worker a contractor.
To know whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions.
Myth: If a worker’s contract has a section that says they are a contractor, then legally they’re a contractor.
Fact: If a worker is legally an employee, a contract saying the worker is a contractor will not make the worker a contractor at law.
Businesses and workers will sometimes include specific words in a written contract to say that the working arrangement is contracting in the mistaken belief that this will make the worker a contractor at law.
If a worker is legally an employee, a contract specifying the worker is a contractor makes no difference and will not:
- override the employment relationship or change the worker into a contractor
- change the PAYG withholding and super obligations a business is required to meet.
Any questions? @BotBooks, we have answers.