There has been lots of discussion around what is a Contractor and what is an employee in my field, but most Small Business Owners do not know that the law even exists. So in today’s blog I am going to look at what is an Employer, what is a contactor and why it matters. This blog is relevant to you as an Employer, but it is also relevant to you as the Small Business Owner who is looking at contracting themselves out.
Why do you need to know?
There have been quite a few changes in the past few years to the Contractor/Employee definition. So it is important that you look closely at this issue before employing staff, as there are different tax, superannuation and other government obligations depending on whether the working arrangement is employment or contracting. If you get it wrong and don’t meet your obligations, you risk having to pay fines to the ATO.
When do you need to check?
When you are looking at putting a new worker on is the best time to check if they are contractor or employee, before you enter into any agreement or contract. If you already have staff and haven’t checked if they are a contractor or employee, it is advisable to do so now. It is also advisable to check every time you put on staff, unless their arrangement is identical to previous staff. Minor variations in working arrangements can result in different status.
How do you work it out?
One of the misconceptions is that if the person you are putting on has an ABN then they are automatically a contractor. This is not the case, so you need to correctly work out whether your new staff member will be an employee or contractor. I would highly recommend you log on to the ATO and use the Employee/Contractor decision tool. There is one for the Building & Construction Industry and then a General one, so make sure you get the right one. Once you have done the questionnaire it will provide you the status of your staff member. I would print it out and keep it with your staff information so that you have the ruling on hand if needed.
What is an Employee?
Employees work in your business and are part of your business. Some staff are always employees. If you employee any of the following types of workers you need to treat them as employees:
- Company Directors
- Trades Assistants
The characteristics of an employee include the following:
- Ability to sub-contract/delegate – the staff member cannot sub-contract/delegate the work – they cannot pay someone else to do the work.
- Basis of payment – the staff member is paid for the time worked, a price per item or activity or a commission.
- Equipment, tools and other assets – your business provides all or most of the equipment, tools and other assets required to complete the work. OR the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost o the equipment, tools and other assets.
- Commercial risks – the worker takes no commercial risks. Your business is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work.
- Control over the work – your business has the right to direct the way in which the worker performs their work
- Independence – the worker is not operating independently from your business. They work within and are considered part of your business.
What is a Contractor?
Contractors are running their own business. Characteristics of a contractor include the following:
- Ability to sub-contract/delegate – the staff member is free to sub-contract/delegate the work – they can pay someone else to do the work.
- Basis of payment – the staff member is paid for a result achieved based on the quote they provided.
- Equipment, tools and other assets – the staff member provides all or most of the equipment, tools and other assets required to complete the work OR the staff member does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.
- Commercial risks – the staff member takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
- Control over the work – the staff member has freedom in the way the work is done subject to the specific terms in any contract or agreement.
- Independence – the staff member is operating his or her own business independently from your business. The staff member performs services as specified in their contract or agreement and is free to accept or refuse additional work.
There is a lot more information on this subject that I will go into at another stage. But for now, look at the definitions I have given above and if you are worried about the status of your staff or even yourself as the contractor then do the decision tool calculator and then message me and we can talk about it.