Accounting and Tax

Employee or contractor – The consequences of getting it wrong

Marcus Davis
13 March 2019
3 min read

An increase in legal hearings, in addition to ATO and State Revenue audit activity, suggests that the Government is increasing its focus on businesses classification of employees and contractors.

While the line between an employee and a contractor can sometimes be blurred, the consequences of getting it wrong can be very severe.

For example, if you have a contractor who really should be an employee, there is a high chance that you may be failing to meet your superannuation, payroll tax, PAYG withholding and leave entitlement obligations.

Recently, the Federal Circuit Court of Australia found that an employer had failed to correctly treat a contractor as an employee. The employee, therefore, did not receive his correct rate of pay and accrued leave payments and superannuation amounting to over $230,000, plus fines and penalties [1].

In this case, the contractor had an ABN, submitted fortnightly invoices for the hours worked and lodged tax returns as a self-employed contractor. While this arrangement was not a written agreement, it lasted over 21 years.

The Court found that the contractor was, in fact, an employee, as the employer had control over all important aspects of the working relationship. In coming to this decision, the Court took into account that:

  • The Employer supervised and authorised the contractor’s work more or less daily;

  • The Contractor was paid an hourly rate, and used a company car;

  • The Contractor worked 45 hours per week and was provided with a factory key and an office;

  • The Contractor was required to inform his supervisor if he was unable to attend work due to sickness or was leaving work early and had to seek approval in advance in order to take holidays;

  • The Contractor had no ability to delegate his work;

  • Although the Contractor lodged his tax returns as self-employed, he did not hold himself out as operating his own business; and

  • The Contractor had responsibilities to train new employees in certain aspects of the business.

Whilst in hindsight, many of the factors listed above would have most advisers concluding that the contractor was, in fact, an employee, quite often these factors happen over time. What can often start as a truly independent contractor arrangement, can morph unnoticed into an employee relationship.

Importantly for employers, it is not enough to rely on the individual’s seemingly outward acceptance of an arrangement. Nor any perceived inequality in bargaining power – which can be either way depending on the industry – meaning that the party without the power has to accept that the arrangement for what it’s said to be.

When reviewing the circumstances of a particular case, the courts clearly focus on the reality, rather than the wording of an agreement (if in fact one exists).

If you would like to learn more about employee/contractor regulations to ensure you are not in breach of any laws, we encourage you to contact your local Findex adviser for further guidance and advice.

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Author: Marcus Davis | Partner

Marcus joined the Findex team in 2009. With over 15 years' experience working with top tier firms, Marcus has a specialist focus assisting clients from the financial services industry, including superannuation, trusts and investment products.