This document is intended to raise an area of possible concern for discussion and to provide information about workers who may be engaged as contractors but should be engaged as employees.
To remain compliant with the laws of Payroll Tax, Workers Compensation and Superannuation Guarantee, an independent contractor must pass a number of tests to ensure that they “contract for service” and not provide a “contract of service”, which would mean they may be deemed an employee of the business.
You should be aware that penalties apply if it is determined that you have not been complying with the relevant laws and have not engaged workers on the correct basis.
The penalties include:
1. For PAYG not withheld: The ATO will calculate and impose a requirement on the employer to pay the unpaid PAYG tax together with interest. The employer then has to deal with having overpaid the worker and seek to recover the tax from the worker.
2. For Workcover not paid: A revised premium will be calculated and possible penalties of up to the 100% penalty and interest and the unpaid premium.
3. For SGC not paid: The full amount of superannuation must be calculated as well as penalties and interest. No tax deduction is allowed for superannuation paid late.
4. For Payroll Tax: Interest and unpaid tax and possible penalties of up to 90%
5. FairWork may also impose penalties separate to these listed above if a worker has been classified and paid incorrectly.
The Key Test Factors for Independent Contractor
- Control Test – If a business controls the service provided, e.g., how they do it, when they do it and the hours worked, then they are likely to be deemed an employee. BUT if the worker has the right to delegate the work, quote the job for time and cost and they determine the work to be done, then they are an independent contractor.
- Integration Test – If a contractor shows they have other clients and are presented to the public as a business and produce a profit or loss of business, then they are more likely to be an independent contractor and not an integral part of the employer’s business.
- Results Test – If a contractor is hired to produce a result and complete specific tasks the worker is likely to be an independent contractor.
- Risk Test – If a contractor is exposed to the risk of the job, prepared to fix any problems or errors and is exposed to a possible profit or loss on the job, then they are more likely to be an independent contractor.
There is no single or overriding deciding factor that covers all the requirements a business has in meeting their obligations with regard to workers and how they are classified for different agencies and different legal obligations. Each worker’s situation must be assessed individually.
- Review the nature of the work being done and the relationship of the worker to the business every 6 months to ensure workers are still classified as contractors
- Review the terms of the engagement and ensure the contractor payments are excluded from all obligations
- Review the nature of the engagement and consider whether the contractor may be deemed an employee for superannuation purposes only
- Only include the contractor in the payroll tax calculations if the contractor works more than 90 days for the financial year if they are a sole trader, or 180 days if they are a company.
- Review the work of the contractor and monitor and/or reduce the hours/days worked to remain as an independent contractor
- Gain a statement of clarification from the contractor to ensure the contractor has other clients and advertises to the public at large
- If workers need to be re-classified as employees, re-negotiate terms and remuneration. Converting to a casual employee may be appropriate
- If workers are re-classified, remember to include them in calculations for Payroll Tax, and Workers Compensation
- For workers who may be deemed employees, clarify with the ATO – Contractor Decision Tool
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