Watch out small business owners – we’ve got another crack down targeting small business to add to the ATO’s hit list that we wrote about previously – ‘sham’ contracting.
A NSW transport business has recently been handed a record fine of $286,704 for engaging in sham contracting activity. The reasons for the huge, record breaking fines were given due to the employer misclassifying several employees as independent contractors, rather than employees.
Fair Work Australia (FWA) Ombudsman, Natalie James, said the case highlights that sham contracting is a very serious matter because it leads to employees being denied workplace rights and entitlements. And of course that sometimes happens.
However, we think this push is more about the ATO missing out on revenue it could otherwise claim (remember that huge budget deficit the govt have to make up) and making sure they’re getting what’s theirs – payroll tax, superannuation and PAYG.
So before you get caught out, we thought we’d go through the basics of what constitutes a ‘real’ contractor vs a ‘sham’ contractor in the eyes of FWA and the ATO.
Incorrect contractor/employee classification can occur in two ways:
When an employer intentionally claims that one of their employees is an independent contractor or requires that staff member work under their own ABN in order to continue working
When a business is unaware (or is ‘careless’ as FWA defines it) as to whether someone should be treated as an employee rather than a contractor and you don’t have to intentionally set out to do the wrong thing to get caught out – either as the employer or the contractor.
For example, if you’ve recently started up your own business and you’re spending the majority of your week on a client or two, working from their premises – usually the same times and same days – you maybe deemed an employee for taxation purposes. Just because you have your own ABN doesn’t mean you will fall under the definition of contractor for every job or working arrangement.
If you have ‘contractors’ like this (and they ‘feel’ like an employee), you could be liable for PAYG and super on top of what you’ve already paid them – no matter what was put in agreements between the two of you. Consider this your warning.
If you are a contractor like this, you might not be able to claim all those deductions you thought you could.
See we told you this was more about revenue raising, than workers’ rights.
The difference between employees and legitimate contractors
There are many terms and conditions that need to be assessed before deciding whether you’re classed as an employee or a contractor. Here’s a few things that will set them apart.
- Do ongoing work that is controlled by their employer
- Have equipment supplied by the employer
- Work hours as allocated by the employer
- Are not responsible for financial risk
- Are paid regularly (weekly/fortnightly/monthly)
Independent contractors usually:
- Decide how to do their work
- Decide what hours to work
- Provide their own equipment
- Carry the risk of making a profit or loss and making good on any work
- Have their own insurance
- Invoice for their work in progress payments or get paid at the end of the contract
- Pay their own superannuation and tax
That might seen obvious, but there isn’t just one factor that sets the difference between the two.
If you’re unsure, the ATO’s employee/contractor decision tool is a good place to start.
4 tips to avoid a contracting nightmare
- Get educated – Firstly, know the difference between an employer and a contractor. Secondly, know the law – more specifically the Independent Contractors Act, the Fair Work Act and the common law.
- Review all employment arrangements – whether you’re the contractor or the employer, double check all of your employment arrangements to make sure it’s a genuine agreement.
- Take a look at past case studies – If you are aware of what’s happened in the past to businesses involved in sham contracting, it will make you aware of the extremities that the issue can cause. Have a quick read over this case.
- Seek professional advice – As always, if in doubt, speak to a professional. If you’re unsure of any current employment arrangement, seek advice immediately.