The Dilemma of Employee or Contractor. 6 Factors to Take Into Account

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You are extremely busy and don’t have time to be managing and paying super, tax and other entitlements and your ‘contractor’ has an ABN. They will invoice you for work carried out, what’s the issue with that? The courts could consider this a ‘sham contracting’ arrangement if ever challenged.

A friend of mine recently decided to retire and sell her medical practice. She was alarmed when one of the doctors confronted her with a claim for nearly $200,000, being for unpaid annual leave and superannuation for the period of her engagement. Can you imagine the shock of my friend, as she believed her business arrangement with the doctor was one of a contractor and everything was in order.

As an employer it is prudent to take the time to consider the following 6 factors before engaging a person to carry out work for your business. It is important to note, that not one single indicator can determine if a person is an employee or contractor for tax, super and entitlement purposes.

It is far better to take the time initially to determine the work arrangement put in place than to face issues down the track as my friend did.

  1. Degree Of Control Over How Work Is Performed
  • An employee performs work under the direction and control of their employer on an ongoing basis.
  • An independent contractor has a high level of control on how the work is done.
  1. Control Over The Work 
  • An employee generally works standard or set hours, unless a casual employee whose hours may fluctuate from week to week. An employer has the right to direct the way in which the work is carried out.
  • An independent contractor generally decides what hours are required to complete the specific task engaged to do. They also have the freedom to carry out the work as they see fit within the specific terms of the contract or agreement.
  1. Expectation Of Work
  • An employee usually has an ongoing expectation of work, but sometimes may be engaged for a specific task or specific period.
  • An independent contractor is usually engaged for a specific task.
  1. Tools And Equipment 
  • An employee generally uses tools and equipment provided by the employer or paid a tool allowance.
  • An independent contractor uses their own tools and equipment unless alternative arrangements are made within a contract.
  1. Ability To Subcontract/Delegate
  • An employee cannot delegate or pay someone else to do their work.
  • An independent contractor is free to subcontract/delegate the work. They can pay someone else to do the work.
  1. Independence 
  • An employee does not operate independently of the business. They work within and are considered part of the business.
  • An independent contractor operates their own business independent of the business engaging them. They perform services as specified in their contract or agreement and are free to accept or refuse additional work. [1] [2]

The ATO provides a tool on their website at ato.gov.au/ec where you can answer specific questions to determine if the arrangement you are entering into is one of an employer/employee or business/contractor.

Note: If you engage a company, trust or partnership then the arrangement is one of a contractor for tax and super purposes. If you are engaging an individual then you need to determine the relationship.

If you are a small business owner and are still unclear on your arrangements with workers, give me a call and I can help you assess each individual case as you don’t want to be caught out as my friend was and may have hefty payments to make and maybe penalties from the ATO for non -compliance.

Call me on 0402 819 611 or email lynne@uneedmeaccounting.com.au

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[1] ato.gov.au [2] fairwork.gov.au