Employee or contractor?

An employment status that makes a difference

Legitimate contracting

If your business is looking to put on more staff, first of all congratulations. But secondly, a warning. The engagement status of workers is an important distinction – whether they are employees or independent contractors – and has consequences that can get many employers into unforeseen hot water.

There are different tax obligations for each; and apart from having to withhold tax from salary if your worker is classified as an employee, there will also be obligations for superannuation and perhaps fringe benefits tax compliance requirements (and of course penalties if you do the wrong thing).

It is also important to know that the finer points of the definition of an 'employee' and a 'contractor' may differ between the laws governing different taxes (as well as workplace laws).

The Fair Work Act prohibits 'sham contracting arrangements', where an employer treats a worker as an independent contractor in an attempt to dodge meeting employee entitlements. The unscrupulous boss who simply converts staff to 'contractors' is acting illegally, and will face penalties for avoiding workers compensation laws for example, as well as prosecution for tax evasion and flaunting compulsory superannuation law.

Legitimate contracting
Legitimate contracting will continue to grow, with more outsourcing becoming the norm. To cover a spike of business coming in the door, many employers look to taking on contracted workers – thinking that when the spate of extra work is over and done with, they can be taken off the books. This is a sensible way to cover a temporary shortfall in staff, and done properly can serve the workplace, and the workers, well.

But if you engage a worker just for their labour rather than for a specified outcome (for example), they are likely to be considered an employee rather than a contractor under the relevant laws. In a sales role for example, even someone working for commission and not receiving a fixed remuneration will usually be deemed to be an employee.

Many an employer has been caught out when they find that the workers they hired as short-term contractors are in fact deemed to be employees, who are entitled to all the usual obligations.

There have been cases where, for example, cleaners have been hired as independent contractors, but a search of the Australian business number (ABN) later found that no such independent 'business' existed and that the hiring business had actually taken on more employees without really intending to.

Bonus article: 11 common employee/contractor myths

Further reading: Hiring: Your staffing options

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