By Emma Watt
Throughout the timber industry in Australia, many businesses use contractors. There is, unfortunately, a great deal of confusion about the rules surrounding contractors, and a significant minority of businesses could be at risk of prosecution and fines for inappropriately managed working relationships.
What is the difference between an employee and a contractor?
Determining the difference between an employee and a contractor can be difficult, and depends on a number of different factors. The ATO web site (ato.gov.au) has an excellent decision tool that can help identify whether someone is likely to be an employee or a contractor. It is not definitive, and couldn’t be considered advice about anyone’s individual situation. It does cover most of the factors that would be considered by a court when deciding whether a particular relationship is employment or contracting.
The factors that need to be considered include:
- The level of control exercise by the employer / hirer i.e. who decides when, where and how the work is performed
- Whether the worker publicly runs a business and advertises their services as available for hire, or if the worker is required to wear a uniform bearing the logo of the employer / hirer
- Whether there is a right to suspend or dismiss
- Can the worker subcontract some of the work
- Whether the worker is remunerated by wages or salary, or if the worker must submit invoices
- Whether the worker or the employer / hirer supplies tools and equipment
- Is the worker required to take out their own insurances and indemnity policies
- Who pays the business expenses
- Which party bears the cost if deadlines are not met, or work needs rectification
It is an offence under the Fair Work Act 2009 for an employer / hirer to represent an employment relationship as a contractor arrangement. This is known as ‘sham contracting’, and can attract very high penalties.
What about the 80% rule?
Many people believe (erroneously) that if a contractor does 80% or more of their work for one business, then they are no longer a contractor.
This is not a factor used to determine the difference between an employee and a contractor. Although, truth be told, if someone is doing more than 80% of their work for one business, it’s likely that they are not actually a genuine independent contractor.
The 80% rule relates to the way a contractor reports their income in their own tax return, and also governs what deductions can be claimed pre-tax. This rule determines the treatment of Personal Services Income.
States and Territories can legislate about owner drivers within their jurisdiction. Check your local requirements.
In Western Australia, hirers are required to ensure that owner drivers they engage as contractors have copies of the current guideline rates of pay and information booklet. There are also laws in WA prohibiting delays in payment to owner driver contractors. The Victorian situation is very similar. Hirers must give owner drivers an information booklet and the current rates schedule.
Forestry contractors are covered by special rules in Victoria. The Victorian Forestry Contractors Information Booklet is aimed specifically at small businesses operating in the forestry industry in that State.
A hirer is required to make superannuation contributions on behalf of a contractor if the contract is wholly or principally for labour. There are some differences in the way this is applied, and it is definitely worth checking your particular circumstances.
If you engage a contractor to perform administrative work (i.e. the contract is wholly or principally for their labour), they are required to perform the work personally, and they are paid according to their hours worked, then it is entirely possible that you would be required to make superannuation contributions on their behalf.
Employers have an obligation to withhold income tax from payments made to employees (PAYG). Hirers are required to withhold PAYG if the contractor does not supply a proper tax invoice.
If a subsequent assessment of the relationship by the ATO determines that the person doing the work was, in fact, an employee rather than a contractor, then the employer could be prosecuted for failing to comply with their tax obligations.
Even genuine independent contractors may well be ‘deemed workers’ for the purposes of workers’ compensation. The rules about superannuation for contractors, and even for contractors’ employees, are different in each State and Territory.
Genuine independent contractors need to be able to demonstrate to hirers that they hold appropriate insurances, such as:
- Public liability insurance
- Professional indemnity insurance
- Workers compensation insurance (although note that often sole traders can’t get this type of insurance)
Employers and hirers are responsible for the health and safety of all workers at their workplace, regardless of whether they are employees or contractors. Even if you have hired a contractor for their specialist skills and knowledge, you should still ensure that they work safely. When contractors come onto your site, make sure they complete any induction that you have deemed appropriate for all visitors to the site.
Emma Watt is an industrial relations consultant who has, for many years, provided advice and assistance to employers in the timber industry. She currently advises timber and hardware members of the MGA. Emma’s very keen to make sure that employers know their rights and obligations, so they can sleep well at night.