I run a small business and have a few people that have been contracting exclusively for me over the last couple of months. How do I know whether they should be considered employees or contractors?
When it comes to accurately categorising whether employees are employees or contractors, there is unfortunately no straight-forward rule but rather several factors that you need to consider. It is vital for your business that you know the answer too. The assessment of a person as being either an employee or a contractor will influence your superannuation commitments, payroll tax liabilities, PAYG withholding and leave entitlement obligations, all of which can have significant consequences if done incorrectly.
Firstly, contractors are typically free to delegate work to their own employees or engage sub-contractors, whereas employees must perform the work themselves. Secondly, a contractor is more likely to be paid for achieving a result and based on a pre-agreed quote, whereas an employee is more likely to be paid for the hours they work irrespective of output.
A contractor would typically bring their own tools and equipment whereas an employee would be provided these by their employer. Then there is the question of defective work, if your business owns the responsibility and wears the cost for fixing any defect stemming from work completed on behalf of your business by an individual, they’re likely to be considered your employee.
Two final factors are control and independence. An employee must follow your business’ directions and do not have much discretion to accept/reject a task. This is very different to a contractor who normally has the freedom in how to carry out a job and the decision to accept additional work is at their discretion.
The classification of persons as either employees or contractors continues to be a focus for the ATO, particularly off the back of the recent 2018-19 federal budget announcement that payments to employees, including salaries, will be non-deductible where the employer has failed to report and withhold PAYG on those payments, for example, where an employer has incorrectly classified an employee as a contractor.
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Any information in this article has been prepared without taking into account your unique personal circumstances. You should seek professional advice before acting on any material. While reasonable care is taken in the preparation of this information to the extent allowed by legislation, Crowe Horwath (Aust) Pty Ltd ABN 84 006 466 351, accepts no liability whatsoever for reliance on it.
Marcus Davis, Tax Specialist, Crowe Horwath