A number of recent case decisions have challenged the traditional view on the determination of common law employees and independent contractors for superannuation guarantee contribution (SGC) and PAYG withholding purposes.
Traditionally, the difference between an employee and a contractor was almost exclusively determined under the control test. That is, an employee is “controlled” in the sense that they are told, not only what work is to be done, but also how and when it is to be done.
The recent case decisions establish that there is no conclusive definition of what an independent contractor is, and each case needs to be considered on its own. However, as a general guideline, the following factors should be considered in determining whether an individual worker is a common law employee or an independent contractor for SGC and PAYG purposes.
- Integration
- An employee works in your business
- A contractor carries on a business on in his own right
- Delegation
- An employee cannot delegate his duties to others except for delegating to other employees
- A contractor has unlimited power of delegation and can delegate to other employees or subcontractors
- Level of control
- The employer has a right to direct the employees what to do and what not to do, and also how and when it is to be done.
- The contractors maintain a high level of discretion and flexibility as to how the work is to be performed.
- Risk
- The employer, not the employee, bears all the commercial risk including poor workmanship or injury sustained in the performance of work
- The contractor, not the employer, bears all the commercial risk including poor workmanship or injury sustained in the performance of work
- Assets and expenses
- The employee generally performs the work on the employer’s premises and using equipments provided by the employer
- The contractor provides his own equipment and incurs his own expenses to complete the work
- Results
- The employee is generally paid an hourly rate, piece rates or award rates
- The contractor is contracted to produce a given result and paid upon performance of the contract.
If the employees are mistakenly treated as contractors by the employer, the financial implications can be devastating. The business will be required to pay 9% superannuation guarantee contributions on top of the contracting fees it has already paid. All the future contracting payments will be subject to PAYG withholding tax. The business is required to remit the withholding tax to the ATO and prepare PAGY payment summaries for payments made to the workers.
The following issues will be addressed in the following weeks
- If a worker has an ABN, is he a employee or a contractor
- If a worker is engaged through a company, is he a employee or a contractor
- If a worker is determined to be a contractor, do I have to pay SGC for the contractors
- What are the criteria used to determine if a worker is a contractor or an employee for payroll tax and worker compensation purposes