Recent co-ordinated audit activity from the ATO, State revenue offices and workcover authorities have highlighted the importance of making the correct distinction between a legitimate contractor and a deemed employee. The costs of getting it wrong can be significant, particularly to small businesses.
Often businesses are looking to reduce the red-tape and administrative hassle of engaging a worker and so will look to hire them as an ‘contractor’.
As part of their audits of a business’ “contractors”, the regulators will look at the substance of the relationship, rather than the contract and have recently been focusing on the following key indicators:
|Degree of control over how work is performed||Performs work, under the direction and control of their employer, on an ongoing basis.||Has a high level of control in how the work is done.|
|Hours of work||Generally works standard or set hours (note: a casual employee’s hours may vary from week to week).||Under agreement, decides what hours to work to complete the specific task.|
|Risk||Bears no financial risk (this is the responsibility of their employer).||Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy. An independent contractor will also generally be responsible for rework in the event of a fault.|
A more detailed list of factors can be found on the ATO’s website.
How do Businesses typically get caught out?
The most common trigger for an audit is after an contractor’s complaint to the ATO after their contract has ended. If the contractor is successful in having themselves classified as a deemed employee, they may then be eligible to receive superannuation, back-pay (depending on the award), annual leave and long-service leave based on their past service or even compensation for unfair dismissal.
Aside from direct complaint being filed, we are also aware of an increase in random audits, especially from a state revenue office looking for additional payroll tax. Audit results are then shared with other revenue authorities triggering further audits. Particular industries that are deemed to be high risk include building & construction industry, chiropractic and allied health professionals.
What does it cost to get it wrong?
Consider the following scenario. A firm engages an individual to fulfil a 12 month contract due to an employee’s maternity leave. The contractor has an ABN and a registered business name and has requested to be hired as a contractor rather than as an employee. As the agreement states the contractor will be responsible for their own superannuation and will not receive leave entitlements, they are paid higher rate of $300 per day to cover these costs. The contractor will use the business’ existing equipment (computer etc.) and will invoice the business weekly for days worked. After 12 months, the contract is finished and the contractor has been paid a total of $75,000.
A few months after leaving, the business receives a written request from the contractor seeking unpaid superannuation ($7,125) and annual leave entitlements ($3,000), threatening to contact the ATO if these are not paid. As the business has written confirmation from the contractor stating their daily rate included all entitlements, the business rejects the worker’s request and challenges the ATO’s audit. Following the various audits, the contractor is found to be a deemed employee and the business is hit with the following costs:
|Unpaid superannuation (SGC)||$7,125|
|Interest & penalties component of SGC||$2,204|
|Unpaid annual leave (2 weeks)||$3,000|
|Penalty for failure to withhold tax||$36,750|
|ATO Interest & penalties||$4,410|
|Payroll tax (SRO)||$3,831|
|SRO interest & penalties||$389|
|Workcover penalties & interest||$1,500|
|Professional fees – Legal & Accounting||$10,000|
Assuming best case scenario and the business successfully applies to each authority for 75% remission of interest and penalties, thereby reducing the payable back to only $38,422. As part the audits, the authorities will often review not just the employee in question but the rest of their workforce.
How can I protect myself?
If you engage independent contractors, start with the ATO’s online contractor/employee decision making tool.
If you are still unsure about the requirements or would like to review your current and future contractors, please contact our office for further information.