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:
- If the individual does not quote an ABN when submitting an invoice for work undertaken, tax must be withheld at the top rate;
- 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;
- 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.
BE VERY, VERY CAREFUL – BUSINESSES CANNOT AUTOMATICALLY AVOID ALL OBLIGATIONS BY ENGAGING STAFF AS CONTRACTORS
Reliable Couriers Pty Ltd AND Q-COMPIndustrial 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.
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.