There are a number of reasons that businesses attempt to class their workers as contractors rather than employees. Advantages typically include ensuring that workers are responsible for their own taxation and superannuation reporting and payment obligations. However, the ATO has seldom been unsuccessful in challenging arrangements whereby workers who are truly employees are being treated by businesses as contractors under Superannuation Guarantee legislation.
Government has suggested that the approach taken to the issue by the ATO is too inflexible. However, the ATO is understandably unwilling to let go of what has to date been a very lucrative method of raising revenue.
Presently, there is no time limitation upon the recovery of outstanding superannuation guarantee payments. Therefore, those who own or operate businesses must be proactive when it comes to whether their workers are treated as contractors or employees. Otherwise, such businesses can face exposure to significant liabilities. Given that a new Financial Year has just begun, it is an appropriate time for businesses to review the arrangements that they have with workers.
Unfortunately, many businesses take a very superficial approach to the treatment of their workers. Too much emphasis is often placed on the way in which the agreement between the worker and the business describes the relationship. In actuality, the law looks past the contents of the agreement and through to the factual matrix surrounding the relationship. The ATO can and does classify contractors as employees in circumstances where those workers are performing the role of employees.
In order to correctly determine whether a worker is an employee or a contractor, businesses need to assess the whole working arrangement including the specific terms and conditions under which the work is conducted. The ATO consider six factors when assessing the nature of a relationship between a worker and his or her principal, including:
- The alibility of the worker to subcontract or delegate tasks;
- The basis upon which the worker is to be paid;
- Whether the principal provides the worker with equipment, tools or other assets;
- Whether the commercial risks lie with the principal or the worker;
- The level of control that the principal has over the way in which the worker operates;
- The amount of independence that the worker has.
All businesses should be aware that the ATO can impose penalties if those who are in reality employees are treated as contractors. These penalties include:
- PAYG Withholding penalties for failing to meet PAYG Withholding obligations;
- The imposition of Superannuation Guarantee Charge (SGC) for failing to meet superannuation contribution obligations; SGC comprises:
- The amount of super contributions that the business ought to have paid to a complying fund (known as super guarantee shortfall amounts);
- Interest; and
- An administration fee.
Furthermore, businesses that operate through companies should be aware that SGC is one taxation liability for which company directors can be made personally liable by way of a Director’s Penalty Notice.
The law in relation to whether workers are treated as employees or subcontractors is complex. Irish Bentley Lawyers offer a one hour initial consultation for a fixed price of $300.00 (inclusive of GST). Our initial consultations are a cost effective way to discuss any legal issues that you may have and ensure that you are aware of your legal rights, obligations and what solutions are available to those legal issues.
The intention of all Irish Bentley Lawyers news articles is to provide commentary and general information. Irish Bentley Lawyers’ news articles ought not be relied upon as legal advice. Readers should seek formal legal advice that is appropriate for their unique circumstances.