When you engage an individual as a contractor you may find that the individual is considered to be an employee at law, and this brings with it a range of legal obligations – and liabilities if you get it wrong.
Specifically, you should be aware that simply calling an individual a ‘contractor’ on paper, or the fact that they have an Australian Business Number (ABN) or a registered business name, does not mean that this is determinative of the relationship. This is the case even if they operate through a trust, partnership or company, or even through a labour hire agency.
Determining if an individual is an employee or contractor at law, first requires the application of the common law test. Courts have traditionally assessed the relationship against a range of indicia, all of which, when combined, determine the true nature of the relationship.
Even if the common law test determine that an individual is a contractor (at common law), some legislation captures contractors by either:
- Deeming them to be ‘employees’; or
- Treating payments made to contractors the same as (or similar to) payments made to employees.
Specific legislative and administrative guidelines that you should be aware of include:
- The Superannuation Guarantee (Administration) Act 1992 and Super Guarantee Ruling SGR 2005/1
- The Pay-roll Tax Assessment Act 2002 and Revenue Ruling PT 6.1
- The Workers’ Compensation and Injury Management Act 1981
Generally, the employment relationship is more heavily regulated than a contractor relationship. So, if you incorrectly classify an individual as a contractor, where at law they are in fact an employee, you will find that you are at risk of breaching the law.
If you incorrectly classify an individual as an employee or contractor, you may be liable for:
- Unpaid annual and long service leave, where you have incorrectly classified an individual as a contractor. All employees are entitled to paid annual leave, and may be entitled to long service leave upon reaching the required number of years’ service.
- Superannuation charges, where you have failed to make superannuation contributions for the benefit of the individual either because they are an employee at common law or because they are an ‘employee’ under the extended definition in the SG Act.
- Payroll tax (including penalties and interest) where you have incorrectly claimed contractor payments made to common law employees.
- Potential back pay entitlements under a modern award, where you have incorrectly classified an individual as a contractor. Most non-management employees are covered by a modern award and will have entitlements under the award to a minimum wage, overtime, penalty rates, allowances and leave loading.
- Compensation for unfair dismissal or for other prohibited conduct. Many employees have access to an unfair dismissal regime, and to other remedies where their employer acts to the detriment of the employee. For example, under the Fair Work Act 2009), an employer must not take adverse action against an employee because the employee makes a complaint about safety matters affecting the employee’s employment.
We note the Office of State Revenue is being particularly active on this matter at present. If you have any concerns with regard to this matter please contact Nigel Kingston.