The Difference Between An Employee and an Independent Contractor

Our office has been receiving a lot of enquiries regarding the draft ATO ruling on contractor and employee relationships in practices. The changes will come into effect later this year and was introduced as a result of the Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA case.

The ATO changes will have a significant effect on current contractor agreements, with the ATO cracking down on organisations who are avoiding legal obligations such as superannuation, employee entitlements and Payroll Tax by categorising their employees as independent contractors.

The need to ensure current contractor agreements are reviewed immediately is very important for the sake of both contractor and principal.

To work out if your worker is an employee or contractor, you need to determine whether your worker is serving in your business or is running their own business. You do this by reviewing the legal rights and obligations in the contract you entered into with your worker.

Contracts are usually written, but there may also be oral contracts or a hybrid. Your contract may also be varied based on your or your worker’s conduct. Any label which you and the worker use in your contract to describe your relationship (such as ‘independent contractor’) will not determine or be relevant to how your relationship is characterised.

The ATO has further information on the difference between employees vs independent contractors available on their website here.

Whilst many businesses will already have contracts in place which they believe are authentic Independent Contractor arrangements which do not require the Principal to pay superannuation, this recent case has now established that where the extended definition of “employee” is satisfied, the superannuation guarantee must be paid. The extended test provides that “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

The changes have far reaching consequences for businesses if their independent contractors are deemed employees. If you are audited by the ATO and your contracts are not up to scratch with the new tax directive the ATO can compel you to pay:

1.       Previously accrued and future super

2.       Employee entitlements & penalties; and

3.       Payroll tax (if your total taxable wages exceeds the monthly threshold in your state – check payrolltax.gov.au for updates)

In light of this, it is our strong recommendation that businesses have a solicitor review their contracts and payment structures. As an employer, you are responsible for classifying your worker for tax and super purposes and you need to get it right. If you make an incorrect decision, you may face penalties that could have otherwise been avoided.

 Litton Legal are able to undertake such reviews and compliance checking on a fixed fee basis. Contact our team here.