Thinking of engaging contractors or working as a contractor? All contractors should operate through a company with an A.C.N. (Australian Company Number). An A.B.N. (Australian Business Number) is not the same thing. Sole traders, partnerships and most trusts are not corporate entities. Why worry? Well, the law distinguishing non corporate contractors from employees is murky. The general test is whether the contractor is operating their own independent business or not but the devil is in the detail. The benefit of dealing with a company is that it will normally be regarded as a separate legal entity for legal purposes. The major traps to consider when dealing with non corporate contractors are:
- The principal in a contracting relationship is still required to pay compulsory superannuation for a non corporate contractor where the contractor provides primarily their own labour (which will include many “white collar” contractors), regardless of whether they are an employee or not.
- The ATO may look to the principal for payment of tax if a non corporate contractor does not pay appropriate tax on their income.
- If the relationship turns sour, the “contractor” may decide to claim employee benefits such as annual leave, award based overtime payments and allowances or, even worse, bring a claim of statutory unfair dismissal or breach of workplace rights or discrimination.
- But the biggest potential danger involves contractor injuries. A principal can require that a contractor have their own insurances (ie public liability, professional indemnity, income protection) but if the contractor suffers an injury they may make a claim for workers compensation and the principal cannot force the contractor to claim on their own insurance. If the workers compensation authority determines the contractor was an employee, the principal will generally be liable not only for the whole amount paid out to the injured worker but also for stiff penalties.
If a principal wishes to deal with a non corporate contractor, it should ensure that an appropriate contractor agreement is in place and the principal should maintain its own insurances to cover the contractor as if they were an employee and also ensure the contractor is paid more than they would be entitled to under minimum legislative/award conditions.
If you are a budding contractor, it may be simpler to start out as a sole trader but you should ensure you have your bases covered, particularly with insurance. If you are negligent in your work and do not have professional indemnity insurance, you may find a claim being made against you by the principal (or even worse, the principal’s insurance company) for any claim they have to pay because of your conduct. And if you dont have income protection insurance and suffer an injury, you may find yourself without any source of income for an extended period.
In an increasingly litigious environment, it pays to get these things right. Please contact us if we can help.