Employees or contractors, that is the question

SMALL businesses should think through the hidden consequences before deciding whether to hire people as employees or contractors, Ross Greenwood reports.

WHEN a business puts on a worker, the first question they must ask themselves is whether the person is an employee or a contractor.

The difference has big implications for taxation and paperwork. The Tax Office says businesses must differentiate between employees and contractors before a person is put on. And, often, that might not be so easy.

The attraction for an employee to be hired as a contractor is obvious. Depending on their income and tax rate, they can technically be taxed less. For example, if they operate through a company, their profits will be taxed (from dollar one) at 28.5 per cent.

For the employer, the attraction of putting on a contractor is also obvious. They are not required to pay on-costs including holiday pay, long service leave, superannuation or workers’ compensation, which is generally the responsibility of the contractor.

The employer can also take on contractors for short periods, giving them flexibility in the workplace and no ramifications if they put off the contractor at the end of the period.

But there is scope for exploitation of contract workers, if employers choose to force otherwise full-time employees into such arrangements. Basic rights including unfair dismissal laws can be avoided if businesses force their workers to become contractors.

For this reason — but also with the object of making certain tax is not avoided by workers — tests were put in place by Fair Work Australia and the Australian Tax Office to determine if a worker is an employee or a contractor. And there are grey areas that can make it hard for employers.

To begin with, there is no hard and fast rule about who is an employee and who a contractor. There are, instead, six basic areas that have to be considered and each of these has its own nuance. The areas are:

1) The ability to subcontract or delegate. A contractor generally does not have to do the work themselves and can subcontract or delegate the work out to someone else.

2) The basis of payment. A contractor will be paid for a project or result set out in the contract. An employee, generally, will work set hours.

3) Equipment, tools and other assets. Generally a contractor will provide their own tools and equipment. An employee will use the equipment of the business they work for.

4) Commercial risks. An employee will generally take no commercial risk for the work they perform. The risk will be taken by their employer. On the other hand, a contractor will take commercial risk on the work performed and will be legally liable to correct any mistakes.

5) Control over work. A contractor will have freedom in the way the work is done, subject to the terms of the contract or agreement. An employee will be directed by their employer about how the work will be performed.

6) Independence. A contractor will operate their business independently of the business they are contracted to. As a result they are free to accept or refuse additional work. An employee is considered part of the business.

A classic example showing the difference between contractors and employees emerged inside Australia Post. If a postie delivers a parcel they are bound to knock on the door to see if the person is home.

Contractors are not bound by such conditions and it is alleged many do not knock, but simply leave a notice saying the parcel has been taken to the nearest post office. It’s reported this practice is the cause of 80 per cent of complaints against Australia Post.

But until it changes the terms of its contracts, there is little Australia Post can do to change the situation — because it cannot order contractors to change their behaviour.

Originally published as Employees or contractors, that is the question