Keep in mind the following information is General Advice and is obviously not personalised for your unique needs, objectives or financial situation. Please get in touch with your advisor before taking any action on the below points so they can advise on the appropriateness of this for you.
If businesses don’t correctly distinguish their workers as employees or contractors, it may result in significant penalties and charges. Determining whether your workers are employees or contractors impacts the types of obligations owed and the rights of the employees. Failure to do so results in harsh penalties and headaches.
The importance of classifying whether your workers are employees or contractors is due to the different obligations to workers namely in worker’s rights, taxation, and superannuation treatment.
Both the Australian Tax Office (ATO) and Fair Work Ombudsman (FWO) ensure compliance and administer penalties when incorrect classification has occurred. It’s important to understand the differences between taxation and superannuation requirements between different categories of workers. Firstly, let’s unpack the differences between Employees and Contractors.
Difference between Employees and Contractors
As an overview, an employee works in and is part of your business whereas a contractor has their own business and completes work for your business. However, there are many factors FWO or ATO takes into account to look at the entire relationship, not just the contract.
The Courts have formulated a multi-factor test to consider the following factors when determining when a worker is an employee or contractor. The weight attributed to each factor varies depending on the case. The factors include:
- An employee can’t subcontract or delegate their work, whilst a contractor can pay someone else to do the work.
- An employee’s basis of payment is for either the time worked, a commission, or a price per item or activity. Meanwhile, a contractor is paid for a result achieved based on the quote they provided. This quote can be calculated using hourly rates or price per item to work out the total cost of the work.
- An employee’s business provides all or most of the equipment, tools, and other assets required to complete the work, or the business reimburses or provides an allowance for all assets the worker provides. Whereas a contractor provides most or all assets and does not receive an allowance or reimbursement.
- An employee takes no commercial risks for sub-standard work and is not liable for the cost of rectifying any defect in their work whereas a contractor takes commercial risks and would be liable for the cost of rectifying any defects.
- An employee’s business has the right to direct how the worker does their work whilst a contractor has freedom in the way the work is done, subject to the terms in any agreement or contract.
- An employee does not operate independently of your business. They work within and are considered part of your business. A contractor is operating their own business independently of your business. They perform services set out in their agreement or contract and are free to accept or refuse additional work.
It is against the law to call a worker a contractor whilst treating them as an employee. By mischaracterising workers businesses face serious penalties, including back pay of unpaid wages, leave entitlements, fines and charges. If you require assistance on how the ATO or the FWO distinguishes employees and contractors, speak to your Morrows advisor or the People and Culture team
Taxation and Superannuation Differences
Incorrectly classifying and treating employees as contractors illegally lower a business’ labour costs by not meeting their tax and super obligation whilst also denying their employee entitlements. The major differences in taxation and superannuation obligations and treatment between employees and contractors are:
- For employees, businesses must withhold PAYG withholding from the employee’s wages, and report and pay the withheld amounts to the ATO. For contractors, businesses do not need to withhold from their payments unless they did not quote their ABN or you have a voluntary agreement with them to withhold tax from their payments. If the PAYG withholding obligations are not complied with then the employer will not be entitled to the taxation deduction for the payment in addition to penalties and interest.
- Businesses must report and pay fringe benefits tax (FBT) to employees if you provide them with fringe benefits. There are not FBT obligations provided to contractors.
- Eligible employees must be paid superannuation at least quarterly whilst businesses may only have to pay superannuation for individual contractors if the contract is principally for their labour.
It’s essential to ensure you have correctly classified your workers to avoid penalties, fines, or court. Businesses must comply with the different obligations required by different worker classifications including worker’s rights, taxation, and superannuation.
If you are unsure whether you are correctly classifying your workers, you must seek guidance as soon as possible. Please speak to your Morrows advisor or contact us.