5 popular ‘contractor’ myths that can sink your business.
There’s no question that employing staff in Australia is a major risk. Taking on an employee means paying entitlements, superannuation, tax, understanding complex legislation and entering into contracts that restrict your decision making.
One of the most attractive solutions to these problems is often hiring a contractor. Contractors, by nature, forego almost all of the above complexities, you’re able to fix costs, and put them on or off as you see fit.
It’s no wonder so many businesses opt-out of employing for a contractor whenever the chance may arise. But, hiring contractors is fraught with risk that most business owners have no awareness of.
As a general summary, if you appoint a contractor that doesn’t meet the current defining framework of a contractor, that person is actually an employee. And, that can mean back paying minimum entitlements, leave accruals, tax, super, and public holidays. Let’s not forget fines and penalties from the Fair Work Commission.
Here are a few myths that can land your business in hot water:
The 80/20 Rule: overwhelmingly, the single-most common answer I’m given by business owners when I ask, “how do you define a contractor?”, is “I go by the 80/20 rule”. What they mean is the contractor’s workload provided by your business doesn’t exceed 80% of the overall work completed by their own entity, under their ABN.
The 80/20 rule has no relevance what-so-ever in the defining of a contractor vs an employee, as far as employment law (or Fair Work) compliance is concerned. It’s simply an Australian taxation rule that allows a business to claim specific tax deductions and nothing else.
Once a contractor, always a contractor: using a contractor for a specific job, then extending their services outside of the contracting scope for another job to be performed, may actually make them an employee by definition.
Just because there is a contracting agreement in place with a person, doesn’t mean all work they perform under your instruction will automatically fall under that agreement. It’s critical that all services are identified as contracted services, not just for commercial liabilities and default rectifications, but for employment law compliance also.
Worker requested contracting agreements: where employees or workers request to be paid through an ABN, it never means your business must comply, no matter how attractive that option may be. Way more often than not, it won’t be legally compliant to do so. That means risk.
Unless, overall, the relationship between you and the worker looks, feels, sounds and smells like a contracting relationship (see additional information below), you should never entertain the thought of paying a worker through their ABN.
Provision of invoices: if a worker is providing you with invoices for work completed, it doesn’t mean they’re contracting. Providing invoices is only one single determining factor of the contractor vs employee argument. There are many other factors that need to be considered to assess the overall working relationship, to decide whether or not a contracting relationship is, in fact, taking place.
Having a contracting agreement in place: if the agreement between you and your worker says they are a “contractor”, this alone is never enough to place you in the clear. Wherever the working relationship fits the legal definitions of an employee more than a contractor, any agreement you and the worker have in place is void.
Business owners need to understand all the ‘tests’ the legal system will apply to their working relationships, not just provide a document that both parties agree to, and assume is legally binding.
So, what’s the framework?
Just having an ABN or business name, just because using contractors may be common practice in your industry, or just because you only have a short-term requirement doesn’t mean you can use contractor agreements to get around hiring employees.
If you do you need to make sure that, overwhelmingly, the agreement (in practice) looks, feels, sounds and smells like a contracting agreement.
That means understanding the definitions and/or requirements across:
- The amount of control the business owner has over the contractor’s activity
- Setting up work schedules and hours of work
- Communications around the expectation of ongoing work
- Which parties are holding the financial burden and risk of the work being performed
- Provision of tools and equipment
- Paying taxes and superannuation
- The way fees for services are charged
- Plus, any other terms and conditions that may reflect an employment relationship is actually taking place
It’s a minefield and many businesses are at risk right now. Reach out to me for help or more advice, and protect your business from unnecessary risk.
Are you concerned about the risks in your business? Do you use contractors where employment doesn’t seem to be the best option?