The ATO has recently issued guidance for contactors entitled “Common myths about the employee/contractor decision” and we thought it would be useful to look at some of them.
It is common for people to be engaged as contactors in certain industries. If a business uses contractors, the business may be able to avoid payroll tax, superannuation, Worksafe and a whole range of industrial relations issues. However changing employees to contractors, or setting up a new business using the contractor model is dangerous and could lead to penalties.
Contractor or employee?
As a general principle, if the person is subject to your direction in how they carry out the work, and is paid by the hour or on piecework rates, then they are an employee. The worker may however be a contractor if they bear the responsibility for the finished product and are paid to complete a specified result.
The worker has their own ABN therefore they are not an employee.
The facts of the relationship with the worker are not changed by the worker having an ABN, or for that matter charging GST. If the worker is subject to the direction of the employer and is paid hourly or on a per unit basis, they may be deemed an employee. The worker can be your employee even if they do the same work for other people.
I can be a contractor as long as I get less than 80% of my income from one source.
The 80% rule relates to personal services income legislation and is used to determine eligibility for deductions. Having 80% of income from one source is not a determinative factor in whether the worker is an employee or contractor.
The worker is a contractor as they have a registered business name.
A registered business name may indicate that the worker is running a business, but is not indicative in itself that they are a contractor in every supply arrangement.
The worker pays their own superannuation, therefore they are a contactor.
The need to pay superannuation is determined by whether the worker is an employee, and this is determined by the nature of the working relationship with the employer and the method of payment. Voluntary agreements for a worker to pay their own superannuation in return for a higher rate of pay are not effective and the employer may end up paying superannuation as well as a higher rate of pay.
The worker prefers to be paid as a contractor and chooses to issue an invoice.
Again, the nature of the working relationship determines whether an employer/employee relationship exists. Presenting an invoice does not in itself change the employee into a contractor.
This area of law is complex and if you need further assistance, please talk to your Saward Dawson advisor.