There are many reasons why it is critical for a business to understand the characteristics and differences between an employee and an independent contractor.
Recently, the High Court handed down its decision in “CFMEU vs Personnel Contracting” which has helped clarify some of the issues and to provide a clearer definition.
When a business engages workers, the question is “whether they be classified as employees or as genuine contractors”?
The bigger issue
This question engages many businesses and can create a situation that can follow into administration and liquidation. Some of the questions involved are:
What claims do individuals have?
Are they a priority creditor (employee)?
Are they an ordinary unsecured creditor (contractor)?
These are fundamentally important questions, as employees may have recourse to be paid by the government’s Fair Entitlements Guarantee (FEG) scheme. In contrast, ordinary unsecured creditors will only receive something if a dividend is paid to them after priority creditors are satisfied.
The High Court’s definition
This is a very complex field. The High Court has made it clear that there needs to be a focus on the terms of the contract between the parties. That is, the whole of the relationship needs to be examined to make any determination. The High Court considered both the business integration test and the control of the person as its primary tests. The use of labels did not determine the relationship.
So, in other words, determining if a worker is an employee or a contractor is a question of fact determined by objective assessment of the relationship between the parties.
The definitions
The key distinctions between an employee and a contractor can be summarised as follows:
- Employee – an employee serves in a business performing work as directed, as a representative of the business.
- Contractor – provides services to a business, carrying out the work as a principal of their own business and furthering the prospects of their business.
Other considerations
Apart from the above distinctions, you will also need to consider the following considerations carefully:
- Control – who determines how, where and when workers perform their work?
- Delegation of work – who has the ability to delegate and pay others to do the work?
- Remuneration – is the work results based?
- Equipment – who provides the tools and/or equipment to complete the work?
- Risks – who bears the commercial risk for any costs arising from injury or defect in their work?
Even if a worker provides services through a company or trust, this does not necessarily lead to the worker being classified as a contractor. It is the intention to create an employment relationship that is paramount.
The consequences
The consequences of getting this relationship wrong are far reaching. The team at dVT Group have encountered many situations where contractors have been deemed employees. This has mainly been in the services industries such as security guards, construction etc.
Some of the issues that can result if contractors are wrongly deemed as employees are:
- PAYG withholding tax is deemed owing on the grossed-up amount paid;
- Superannuation becomes outstanding on the grossed-up amount;
- Payroll tax may become due;
- Workers compensation insurance will increase.
In addition to this, penalties and interest will be applied.
So, whether you are dealing with existing or new workers, it is important to get this relationship right!
The ATO released a White Paper in February 2023 discussing this issue. https://www.ato.gov.au/business/employee-or-contractor/difference-between-employees-and-contractors/. It is worth reading to obtain an understanding of the implications and consequences.
If you think that some of the issues raised might have an impact on your business, please feel free to give us a call to discuss. Contact Riad Tayeh at dVT Group on (02) 9633 3333 or by email rtayeh@dvtgroup.com.au.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.
