SMEs are commonly being caught out by misunderstanding whether their workforce comprises contractors or employees, which can prove to be a costly mistake.
The issue was flagged recently by Aaron Smith of fitness company KX Pilates, who spent tens of thousands of dollars converting all the trainers across his 37 studios to PAYG employees in order to avoid the legal grey areas that arise around contractors.
HR consultant Clare Long, of Norgay HR Consulting, says the legal situation surrounding contractors and the rights and responsibilities of businesses hiring them is “a grey area indeed”.
“In our work with SMEs, we see business owners being caught out by a number of misconceptions when it comes to contractors,” she says.
According to Clare, there are six misconceptions that keep cropping up again and again, which need to be resolved to avoid coming unstuck with the tax office, courts or other government agencies down the track:
Myth #1: They have an ABN, so they’re a contractor
“Having an ABN makes no difference to whether a worker is an employee or a worker.
“To be classed as an independent contractor, a worker would need to have a high level of control over how work is done, including the choice to hire others to assist them.
Myth #2: They have a registered business name and submit invoices, so they’re a contractor
“Having a registered business name is not a factor when determining whether or not a worker is a contractor or employee.
“Submitting an invoice doesn’t [automatically] make a worker a contractor.”
Myth #3: The 80/20 rule
Clare says many business owners believe that if a person spends less than 80 per cent of their time working for the business, then they are a contractor. However this, too, is not an accurate definition.
“The 80/20 rule relates to personal services income and can change how a contractor reports their income and claim[s] business-like deductions. It should not be a factor a business considers when determining whether a worker is an employee or a contractor,” she says.
Myth #4: We only take on contractors, so we don’t have to worry about super
“Contractors paid for their individual labour are employees for superannuation guarantee purposes, even if they have an ABN.
“If your contract is with an entity other than the individual actually providing the labour, say a company, then you don’t pay superannuation.”
Myth #5: The worker wants to be a contractor, so we treat them as one
“This is not a matter of choice and business owners can face penalties for not meeting tax and super obligations.”
Myth #6: Our contracts have a clause that says they are a ‘contractor’
“If a worker is legally an employee, then a contract specifying that the worker is a contractor does not change the PAYG withholding and super obligations a business is required to meet.”
How can you determine whether your workers are contractors?
Clare suggests using publicly available tools provided by the government to help determine this point, and hence what our obligations are as an employer.
The ATO website has an employee/contractor decision tool, that asks a number of questions about the employment situation before providing a determination.
“Answer each question honestly – you can generate a report that you should keep for your records,” advises Clare.
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