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Here are a few myths about contractor relationships:
Myth
1. The principal doesn’t have to deduct income tax from
payments due to the contractor or make superannuation contributions
Businesses should obtain expert taxation
advice because tax and superannuation obligations may still
exist for contractors depending on how much work they perform for the
one principal and the nature of the work. These obligations may vary
depending on whether the services are provided by an individual,
company, partnership or trust.
For
example, if an individual provides services as an independent
contractor:
1.
If the individual does not quote an ABN when submitting an invoice for
work undertaken, tax must be withheld at the top
rate;
2. Alternatively, the independent contractor must be
registered for GST and submit a tax invoice quoting an ABN and charging
10% on the supply of the services;
3. Where a contractor performs over 80% of their work for one
business, the business may be required to deduct tax from payments made
to the contractor, as if the contractor was an employee. If deductions
are not made and the worker cannot subsequently pay their tax, the ATO
may look to the principal for payment if it considers there was
properly an employment relationship.
A
contract worker can also be an employee for the purposes of the
superannuation guarantee legislation if the contract is wholly or
principally for labour.
Myth
2. The principal doesn’t have to pay workers compensation
premiums for contractors
Most workers compensation authorities apply what is called a
“results” test to determine whether a contractor is
really an employee or not. This generally requires establishing that a
contractor has been engaged to achieve a specified result, supplies
their own tools and equipment and is responsible for fixing
any defects in their work. Unless a contractor establishes a corporate
entity to run their own business, there can be a very real risk that
the workers compensation insurer will find the contractor is in fact an
employee. This may result in recalculation of premium and imposition of
penalties.
There will be even greater consequences if a claim is made upon the
workers compensation insurer by a person who is said to be a contractor
and a determination is made that they are in fact an employee. This
will result in the workers compensation authority seeking to recover
any amount which is paid out to the “contractor”
from the principal along with penalties.
CASE
EXAMPLE
BE VERY, VERY CAREFUL
– BUSINESSES CANNOT AUTOMATICALLY AVOID ALL OBLIGATIONS BY
ENGAGING STAFF AS CONTRACTORS
Reliable
Couriers Pty Ltd AND Q-COMP Industrial Court of
Queensland, Hall P, 6 September 2005
This case illustrates the
need for businesses to appreciate that engaging staff as independent
contractors may not release them from all legal obligations normally
associated with an employment relationship. Here, Reliable Couriers
engaged couriers as independent contractors and did not name them for
workers compensation premium setting purposes. However, WorkCover
considered these contractors to be “workers” for
the purposes of the Workers’ Compensation and Rehabilitation
Act 2003 (Qld) and issued an amended premium notice which was
challenged by the company. The Act provides that
“worker” includes:
A person who works for
another under a contract (regardless of whether the contract is a
contract of service) unless the person performing the
work-
- is paid to achieve a specific result or outcome; and
- has to supply the plant
and equipment or tools of trade needed to perform the work; and
- is, or would be, liable
for the cost of rectifying any defect in the work performed; or
- a personal services
business determination is in effect for the person performing the work
under the Income
Tax Assessment Act 1997 (Cth).
The President accepted
that the relationship between the company and the couriers was not an
employment relationship. However, he considered that merely specifying
that the work involved “To pick up and deliver various
freight. . .” did not constitute a “specific result
or outcome” and it was necessary to specify the specific
result or outcome at the commencement of the engagement. The President
cited the example of a builder engaging an owner-driver of a truck to
move 100 m3 of fill to another site for an agreed contract price as
meeting the test. Without going on to consider the other arms of the
test, the President dismissed the appeal and held the company liable
for premiums for the contractors.
This case will have
significant implications for many businesses engaging independent
contractors as it confirms a strict approach to whether someone is a
worker for workers compensation purposes. In addition to meeting the
strict test or obtaining a personal services business determination,
businesses may be able to avoid this obligation by ensuring their
contractors have the legal status of corporations, partnerships or
trusts. In addition to workers compensation, taxation and workplace
health and safety are other areas where the common law test of
employment is not the final arbiter of business obligations.
Myth 3. Award
entitlements such as overtime don’t have to be paid if a
person is engaged as a contractor
A
disgruntled contractor who considers they have been underpaid may be
able to make a claim on the basis that they have been paid less than if
they were an employee under award or collective agreement provisions. A
claim may be able to be made under state or federal unfair contracts
legislation or, in a clear case, one of the government agencies with
responsibility for recovering employee entitlements may take action.
CASE
EXAMPLE
BUSINESSES
NEED TO BE CLEAR IN CONTRACTOR ARRANGEMENTS
Jamie Mould AND
FCL Interstate Transport Services Pty Ltd, Queensland IRC,
Commissioner Bechly, 9 March 2003
This case illustrates the
increasing blurring of lines between contractual and employment
relationships, the need for principals to have clear contracts and
monitor ongoing relations with contractors and reinforces that
contractual arrangements cannot be used to pay less than equivalent
award rates to contractors. Mr Mould had worked for some years up to
1996 for FCL as an employed forklift driver. He subsequently purchased
a truck and offered his services as a contractor. The contract was a
verbal one. There were allegations of a subsequent lack of good faith
in dealings by both parties. However, these were not decisive to the
result in the case.
The Commissioner compared
Mr Mould’s earnings over the 4 years with the basic weekly
award entitlements of a similar employee. Having determined that the
State Award provided a basis for comparison to assist in determining
the fairness of the contract, the Commissioner considered the
substantial difference in comparative earnings rendered the contract
unfair. The Commissioner took into account Mr Mould’s actions
in entering the contract, the limited control of the respondent over
hours worked and the benefits derived by Mr Mould during the time and
fixed a global sum of $58 000 to compensate Mr Mould for the overall
unfairness of the contract, a not insignificant sum.
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Contracting Myths