Contractors v Employees

The Company engaging the worker is responsible for classifying them for tax and superannuation, and if you get it wrong, the company can face penalties. In some cases, the company can still choose to pay their contractor the superannuation guarantee charge (SGC).

A business must pay superannuation for an independent contractor if they are deemed employees for superannuation purposes.

This occurs where the worker is under a contract that is wholly or principally for their labour (personal services), or they perform work that is wholly or principally of a domestic nature for more than 30 hours per week, or they are a sportsperson, artist or entertainer paid to perform, present or participate in any music, play, performance, dance, entertainment, sport, display or promotional activity, TV or radio broadcast or similar activity.

Apprentices and Trainees who work to obtain a certificate or diploma, whether full or part time and Labourers and Trades assistants are always treated as employees as they are generally paid under an award with specific pay and conditions, and you must pay their tax and super obligations, as for any employee.

An employee must be a natural person, so if a business engages a company, trust, or partnership to do the work, this is a contracting relationship for tax and super purposes even though the people who do the work may be directors, partners, or employees of the contractor, they are not employees, provided it is not a sham arrangement.

If you hire a worker through a labour hire firm the labour hire company is the employer of the worker and are liable for PAYG withholding, super and fringe benefits tax obligations for the worker. Labour hire firms can be called on-hire firms, recruitment firms or group training organisations and they will refer to your business as the ‘host employer’.

If engaging an individual, the contract terms ( which can be in writing or in writing and oral) will determine if they are a contractor or employee for tax and super purposes. To check if your worker is an employee or an independent contractor, you need to consider the tests set out below.

The table below sets out the key indicators to determine if a worker is an employee or contractor, but no one indicator is determinative and it will depend on the specific circumstances, all factors considered.

For example, a worker who has an ABN or issues invoices isn’t automatically a contractor. Likewise, a worker will not automatically be an employee, or contractor due to the nature of the work they do, as an employee or contractor can perform the same type of work.

Sham arrangements are Illegal under Chapter 3; Division 6 of the Fair Work Act 2009 (Cth). The Act prohibits employers from dismissing an employee to engage them for the same work as a contractor. Penalties can apply of $12,600 for individuals and $63,000 against the company per breach!

The “whole of relationship test” determines if a worker is a contractor or an employee by considering the real substance, practical reality and true nature of the relationship.

Businesses must determine if there is an employment relationship by considering the real substance, practical reality and true nature of the relationship including the terms of the contract and how the contract is performed in practice.

In essence in considering the real substance, practical reality and true nature of the relationship the key factors are:

• Control – the amount of control over how work is performed

• Risk – financial responsibility and risk

• Resources – who supplies the tools and equipment

• Delegation rights – ability to delegate or subcontract work

• Defined hours – determined by the employer or contractor

• Continuing work – any expectation of work continuing.

The whole of relationship test is used to work out if someone is a contractor or an employee from 26 August 2024 and the start of relationship test helps to identify if a worker is a contractor or an employee based on what the parties have agreed and set out in the contract.

If the relationship changes over time, you should ensure any changes are reflected in writing to avoid any doubt and confusion.

It can be complicated, and the relationship may be somewhat “grey” and uncertain, so you do need to consider the arrangement, seek legal advice and properly reflect the arrangement in writing. It is important to be honest and objective about the contractual arrangement to avoid risk and liability as there are harsh penalties that can be imposed under the Fair Work Act 2009 apart from obligations to then compensate a worker for their leave and superannuation entitlements.

For more information, contact: Sanicki Lawyers Employment Group:

Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist | robert@sanickilawyers.com.au | Mobile: 0412 673 757

Terence O’Brien | Special Counsel | Litigation and Liquor Licensing | terence@sanickilawyers.com.au | Mobile: 0424 579 535