Over the past few weeks I’ve had a number of employers ask me if they should consider employing contractors rather than internal employees, and how to do it. Why this surge in inquiries?
Firstly, we all remember the Covid lockdowns. Many employers significantly reduced the size of their workforce, we all learned how to work from home, and an increasing number of people have left their full-time secure jobs to join the freelance and gig economies. These evolutions in both technology and our perception towards flexible work have significantly changed our opinions towards how we design our workforce.
Secondly, let’s consider the significant change in the business environment we work in today. We have soaring inflation and interest rates, tight labour markets, global economic uncertainty, and collapsing high-profile banks in the U.S. and Europe. These events are getting us prepared for difficult times ahead.
It's no wonder in today's business environment employers are considering independent contracting as a viable alternative to traditional employment relationships.
What’s the difference between a contractor and an employee?
On the surface, we all know a contractor is paid using an invoice rather than payroll. However, when considering the use of contractors there’s a whole lot more to it than that. Let’s start by understanding what defines each type of work under the legislation.
Who will have control over how work is performed? A Contractor by definition should have control over how, when and where work is performed. An employee on the other hand has their work controlled by their employer. Are you ready to hand over control to your contractor?
Are you hiring a business or an individual? The person contracting to your business must have their own Australian Business Number, and generate invoices for the service they provide - this means you’re contracting a company, not an individual, to perform a task. Do your Contractor Agreements define this correctly?
Who is providing the tools and equipment to do the job? A contractor typically will provide their own tools and equipment, whereas employees are typically issued with tools of the trade. Don't forget however that some Industrial Awards have allowances that can be paid when an employee provides their own tools.
Can the work be delegated or subcontracted? Employees can’t delegate or subcontract their own work, whereas a contractor can. Are you ready for their work to be delegated?
Who bears the financial responsibility and risk? In an employment relationship, it is the employer who bears responsibility. Contractors, however, hold their own risk, and insurance to protect against any potential liability.
Is there an expectation of ongoing work? While contractors are usually engaged for a specific project or task, employees (other than casual and fixed-term employees) are generally hired with a reasonable expectation of ongoing work.
Is your worker entitled to work for other companies? A worker may be subject to restraints of trade during and after their employment has ended, as outlined in a well-constructed employment agreement. It is however likely that an independent contractor is able to work for multiple clients at once without restraint.
Reading through this list, this is not an 'all or none' approach. It’s the balance of these points above that determines if your worker is a contractor or an employee. Unforuntately this ambiguity doesn't make your decision any easier, so if you’re ever in doubt, please seek advice from a Human Resources or Employment Law specialist.
OK so let's say we've now worked your worker can be an Independent Contractor. Congratulations. What's next?
Who will be paying their Superannuation, Payroll Tax and Workers Compensation Insurance?
The Superannuation Guarantee Act states that when your contractor agreement is constructed to pay your worker for their hours of work (rather than a project fee based on an agreed outcome) and they do the work themselves, the employer may be liable to pay superannuation on their behalf. Certain protections can be written into Contractor Agreements, so again please speak to a professional before writing up a contract. This point has also been raised in case law recently, so keep your eyes open for updates on this topic in future blog posts.
Payroll tax is governed by each state in Australia, so we won’t go into the details here. Pay close attention to the rules in your state, and specifically their rules around what is classified as ‘taxable wages' in the state in which they work.
Workers Compensation is also governed by each state. If your contractor is located in NSW, Schedule 1 of the Workplace Injury Management and Workers Compensation Act 1998 (NSW) states 'a contractor who performs work exceeding $10 in value (not being work incidental to a trade or business regularly carried on by the contractor in the contractor’s own name, or under a business or firm name) and who neither sublets the contract nor employs any workers' is deemed to be a ‘worker employed by the person who made the contract with the contractor’. Therefore you as an employer may be liable to pay their workers compensation insurance also.
As you can see, our answers here cannot be applied to your unique situation without exploring your business more thoroughly. Our advice here is to speak to your taxation expert and have a robust Contractor Agreement in place to determine the right course of action for your situation.
What happens if I get it wrong?
Sham contracting is a term used to define when a company hires a contractor whose work conditions are more like an employee, and is illegal under the Fair Work Act. Just because you have made a Contractor Agreement doesn't necessarily make them a Contractor under the law.
If your business is found to have a sham contract in place, you may be liable for both penalties and backpaid entitlements that your worker would have received as an employee of your organisation.
In Conclusion
If you need assistance understanding how to best structure your workforce, preparing contracts for the engagement of employees or contractors, recruitment and selection, onboarding, performance management, compensation and benefits, and workplace health and safety, JAR Consultants and our industry collaborators are here to help.
To learn more about how JAR Consultants can help your business succeed, check out our Service Solutions page.
To learn about our Collaborators, check out our Collaborators page.
To get in touch feel free to call or email by following the links to our contact details.
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