Are Your Contractors Really Employees?

It’s a question that often comes up in business.

Particularly now In these tough economic times, businesses are looking for flexibility in their employment obligations and ways in which to better manage their labour costs.

For many, this means using more contractors rather than direct employees. 

While this might make sense, it is important to ensure that you do not breach any of your compliance obligations.

There are a number of tax issues you need to consider when engaging contractors including:

PAYG Withholding, Super, Workcover and Payroll Tax.

The fact that a person is described as a contractor, or even agrees to be paid like a contractor, does not necessarily mean that they will be treated that way for the purposes of PAYG Withholding, Super, Workcover and Payroll Tax.

The grey area here is that there is no exact definition of what constitutes an employee and what constitutes a contractor. 

This means that every case is different and needs to be handled as such.

If your contractor operates through an entity such as a company or trust, these will usually get you out of the above obligations.

The tests that you need to look at in determining the contractor / employee relationship include:

  • Does the person principally provide you with labour or does he supply significant tools, machinery and materials required to complete his job;
  • Is the person paid on an hourly basis or for an outcome (i.e. completion of a job or task); and
  • Is the person responsible for the financial cost of remedying any errors or faults.

The simplest of tests is to compare the contractor with an employee of your business.  If there is little or no difference between the two other than the way in which they are engaged, it is very likely that your “contractor” will be treated as an employee for tax purposes.

Take no comfort in the fact that your business colleagues do the same thing. 

There is every chance that they too are treating their contractors incorrectly.

The consequences of getting this wrong can be catastrophic. 

Due to its very nature, it can be years until you are audited by the Tax Office or until a disgruntled ex-contractor dobs you in and you can end up owing huge sums of money together with hefty fines and penalties, all of which would be non-deductible to your business.

If you hire contractors and you would like us to conduct a review of the situation, please do not hesitate to call us.