Contractor or Employee? They have an ABN and invoice me so they must be a contractor. It’s not that simple.
Over the years there has been a shift with how businesses operate. With freelancing and independent contractors more common than ever it’s important business owners understand how the Courts view employment versus independent contractor arrangements as there is a fine line between the two – over step the line and risk heavy penalties.
Agreeing to work as an independent contractor, having their own ABN and issuing you invoices for their work doesn’t automatically make someone an independent contractor. The Courts will look at the true nature of the relationship between the parties, not just what has been set out in a written agreement. Keep in mind that you can’t contract out of your legal obligations.
What will the Courts look at in determining if an individual is an employee or independent contractor?
Unless there is legislation that specifically deems independent contractors to be ‘employees’ or treats payments made to independent contractors the same as (or similar to) payments made to employees, it is the common law test which is applied. The common law test takes into account a range of characteristics about the nature of the relationship to determine, on balance, the status of the relationship. No single characteristic determines whether the person is considered at law to be an employee or independent contractor.
The below table sets out some common characteristics that courts have considered:
The risks of characterising the relationship incorrectly
Generally, if you incorrectly classify an individual as an independent contractor, where at law they are in fact an employee, you will find that you are at risk of breaching the law. The types of liabilities that may arise include:
- If it is found that it was sham contracting arrangement, such that an employer attempts to disguise an employment relationship as an independent contracting arrangement, significant penalties may apply.
- Back pay for entitlements such as minimum wage, allowances, overtime, weekend and shift penalties, and leave loading that may apply under an applicable Modern Award. In addition, you may be penalised for breaching the Modern Award.
- Leave accruals and/or payments for annual, personal and long service leave (where the required number of years of service have been reached). In addition, you may be penalised for breaching the Modern Award or National Employment Standards of the Fair Work Act 2009.
- Financial compensation or reinstatement for unfair dismissal or for adverse action, under the provisions of the Fair Work Act 2009.
- Increased workers’ compensation premiums, where you have failed to cover the individual in workers’ compensation insurance premiums. In addition, you may be penalised for having not had the correct level of cover in the past.
- Penalties payable to the ATO equivalent to the amount of PAYG Withholding that was failed to be withheld from the employee(s) payments plus potential administrative penalties between 25 and 100% of the base penalty.
- Superannuation charges, where you have failed to make superannuation contributions for the benefit of the individual.
- Additional payroll tax (including penalties and interest) where you have incorrectly claimed contractor exemptions on payments made to the individual (for which there are no exemptions available).
If you would like assistance in determining the nature of the relationship between your organisation and an individual, drafting and implementing a contract or agreement which clearly sets out the relationship between the parties and/or advice on your obligations to the individual, contact your usual Hanrick Curran Advisor or alternatively our HR division on 07 3218 3900.