Hiring an independent contractor may seem like a simpler method than hiring a full-time or part-time employee for a business. Or is it?

This is because there is a general assumption that, if hiring an independent contractor, they will not be responsible for PAYG withholding, superannuation guarantee payments, payroll tax and workers’ compensation obligations. This is not always the case.

Each set of rules operates slightly differently, and it may be necessary to address this distinction in a case by case scenario. For those who may be struggling to work out if they have correctly classified their contractors as employees, it will be important to review their 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.

A genuine independent contractor who is providing personal services will typically be:

  • Autonomous rather than subservient in their decision-making;
  • Financially self-reliant rather than economically dependent upon the business of another; and,
  • Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.

As a business, you should ensure that there is a process in place to ensure the correct classification of employment arrangements for hired contractors, and review those arrangements periodically.

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 may be deemed to be employees for superannuation guarantees and payroll tax purposes. It is imperative that compliance obligations are satisfied, lest the business suffer consequences.

The ATO has provided some updated guidance for taxpayers who engage contractors to help in determining whether they have met their tax obligations. This includes a checklist relating to tax and super obligations that can arise when hiring a contractor. If you are thinking of hiring a contractor or reviewing employment agreements involving them, this may be a checklist to adhere to.

There are generally six factors that you can use to determine if you have hired an employee or a contractor.

Basis of payment

Employee = the worker is paid for either the time worked, a price per item or activity or a commission

Contractor = the worker is paid for a result achieved based on the quote provided (based on hourly rates or price per item to work out total cost)

Ability to delegate/subcontract

Employee = the worker cannot pay someone else to do the work

Contractor = the worker is able to pay someone else to do the work

Commercial risks

Employee = the business is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work

Contractor = the worker is legally responsible for their work and liable for the cost of rectifying any defect in their work

Equipment, tools & other assets

Employee = Equipment, tools or other assets needed to complete the work are provided by the business, or an allowance/reimbursement is provided for the cost

Contractor = Equipment, tools and other assets are provided by the individual to complete the work, and no allowance/reimbursement is made for the cost of this equipment

Control over the work

Employee = the business has the right to direct the way in which the worker does their work

Contractor = the worker has freedom in the way the work is done (subject to the terms in any contract/agreement held with the business)

Independence

Employee = the worker is not operating independently of your business (they work within and are considered a part of the business)

Contractor = the worker is operating their own business independently of your business, performing services as specified in their contract/agreement. They are free to accept or refuse additional work

We’re ready to help. If you’re still unsure, getting the right advice now set you on the right path for effectively administering your payroll and insurances, call our team +61 3 9820 6400.

Key Contact
Robert Lissauer
Robert Lissauer

Tax Director

Key Contact
John Christopoulos
John Christopoulos

Business Services Director

Software providers asked to help with TPAR

It is possible by the end of 2023, Taxable Payments Reporting Payments (TPAR) will be all able to be wrapped up in Business Activity Statements (BAS). As a part of the Budget Announcements, the Government issued a statement about working with accounting software providers to see if they have the capacity to deliver specific reporting systems by 31 December 2023. This should allow taxpayers to report Taxable Payments Reporting Payments System data on the same lodgement cycle as their activity statements.

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