Business

In recent months, there has been renewed focus by the Australian Tax Office on the classification of contractors and employees within businesses. There are important factors that need to be considered by every business that engages the services of independent contractors, to determine whether they fall into a contractor relationship or in fact de facto employees. This has further been aided by recent High Court Decisions that have to an extent changed some critical factors that can tip the classification one way or another.

Here are the traditional factors that have been used to determine which category the provision of services would fall into:

1. Who has control over how the work is performed – the business or the contractor themselves.
2. Integration within the business structure vs the contractor furthering their own business services/reputation.
3. The structure of remuneration such as being paid by the hour or to produce a result. An employee is more likely to paid regardless of the result produced.
4. Ability to subcontract/delegate the work to someone else. A contractor has the flexibility to determine how the work can be completed.
5. A subcontractor would provide their own tools/equipment whereas if using the business's tools, they are merely providing the labour.
6. Who is at risk of of any deflects for the work performed, the business or contractor.

If the business is conducting the arrangement where the contractor is mainly providing labour only, without taking on the associated risks of running a business themselves, they are likely to fall into a de facto employee classification. This would require PAYG withholding and incur Superannuation and WorkCover.

Further information on the distinction and classification of these factors can be found in a table on the ATO's website.

Contract

Recent High Court decisions have highlighted the importance of a contractor agreement that is executed by both parties, to determine whether the arrangement falls into an employee or contractor classification. When the contract outlines all the rights and duties that allow the contractor to conduct their work in accordance with the patterns of behaviour outlined in points above, even if the actual work completed does not get carried out in the manner specified by the contract, this in some instances has been sufficient for the court to rule in favour of the contractor relationship.

This does not confirm that a contract alone is sufficient in all cases – especially if it has only been put in place to mitigate the risks for compliance purposes – but it is certainly something a business should consider and look to put in place to help protect their position.

Superannuation

Even if you engage a genuine contractor, there are some instances where they will fall into the extended definition of the Superannuation Guarantee regime in the following circumstances:

1. If the worker works under a contract that is wholly or principally for their labour. The ATO’s current guide to determine this is:
   - Mainly for labour is more than 50% of the dollar value is for the persons skills/expertise and not materials
   - Payment isn’t dependent on achieving a specified result i.e. paid per hour
   - The contractor cannot delegate the work
2. Sportsperson, artist or entertainer paid to perform, present, or participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity.
3. Person paid to provide services in connection with any performance, presentation or participation in these activities.
4. Person paid to perform services related to the making of a film, tape, disc, television or radio broadcast.

Contracting to Companies, Trusts or Partnership

When engaging another entity to perform the services to your business, there can be no basis for the ATO to try and establish an employee relationship, as this can only exist to an individual person. The entity structure provides more protections for both parties.

The Practical Compliance Guide 2023/2 has additional information you would like to review this further. Paragraphs 20-26 have the ATO’s risk framework which detail in what instances you may be classified as low, medium or high risk zones depending on the arrangements you have in place.

The purpose of this article is to raise awareness of any potential issues your business might be facing in this area.

Please get in contact with us if there is anything further you would like to discuss.