Is Your Contractor an Employee?

Business owners need to classify workers correctly to minimise the risk of being penalised later for wrongly classifying workers as contractors when they should be employees.

It’s a common area of concern for business owners who engage contractors. Many Fair Work Ombudsman cases have resulted in severe penalties and back payments imposed for engaging someone as a contractor when they should have been paid as an employee.

The ATO states ‘If you’re a contractor paid wholly or principally for your labour, you’re considered an employee for super purposes and entitled to super guarantee contributions under the same rules as employees’.  It does not matter if the contractor has an ABN or not.

What’s Required in Contractor Agreements?

You should have a comprehensive agreement with every independent contractor.

The contract should include:

  • Details of the nature of the working relationship to demonstrate that a genuine contractor relationship exists.
  • All rights and obligations of both the contractor and the business.
  • Terms and conditions of the agreement.
  • Whether superannuation applies.
  • The main factors used to assess the worker as a contractor such as independence, ability to delegate work, the basis of payment, the use of tools and equipment, the degree of control or the ability to take on other work.
  • The date of the next review of the contract.

Many factors are involved in assessing whether a worker is deemed to be an employee or contractor, and the relationship can change over time. There is no single overriding factor in deciding if a worker is truly an independent contractor.

Therefore, each working relationship must be assessed separately and individually.

If you enter a contract with a company, trust or partnership, you do not have to pay super for the person they employee to do the work.

Time to Upgrade Contractor Agreements

If a lawful agreement clarifies the terms of engagement and addresses all aspects of the working relationship, this will reduce the risk of later being penalised because of wrongly classifying a worker. But for the contract to be relied upon in court, it must address all aspects of the working relationship in enough detail that there is no room for misinterpretation of terms.

Now is a great time to review and upgrade any agreements you have in place with contractors. Do they measure up?

The ATO has a great employee/contractor decision tool to help  you work out if a contractor is an employee for superannuation purposes.

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