The use of contract labour has increased significantly over the last decade. It has been popular for employers and many workers prefer the autonomy and flexibility that being a contractor provides. It is seen as a more flexible form of engagement, matching costs to activity without the responsibility of employment. As a result, many business operators perceive that once they engage contractors and the parties have agreed the contract rate, the other on-costs normally associated with employees can be ignored.
Unfortunately, the ATO do not always agree with this, particularly when it comes to superannuation guarantee obligations. The ATO have been targeting this area for a while and recent wins in some high profile court cases seem to vindicate their aggressive approach.
This may mean that, even though you have agreed with a contractor(s) to pay a higher hourly rate to cover superannuation and other costs, the ATO may deem the contractor an employee for superannuation purposes and require you to pay superannuation and penalties. Importantly there is no time limit to the ATO’s review which means they can go back several years and the shortfall amount could be significant.
When determining whether someone is an employee or contractor the ATO considers several factors. Below we cover some basic points to help you determine whether you should be treating someone as an employee or contractor.

1. Contract “wholly or principally” for labour.

According to the ATO, a contract is principally for labour if more than half the value of the contract is for a person’s labour. If you have any contractors in this category then you definitely need to be paying superannuation for these contractors. A contract may be considered “wholly or principally for labour if;
• Your paid wholly or principally for your personal labour and skills.
• You perform the contract work personally.
• You’re paid for hours worked rather than to achieve a result.
For super to apply, the contract must be directly between you and your employer. It cant be through another person or through a company, trust or partnership.

2. Control

The greater the level of control that can be exercised over a worker the more likely it is they will be treated as an employee. At common law employees are told not only what work must be done, but how and where it is to be done as well.

3. Results

If the worker is engaged to produce a specific result then this will be a strong indicator that the contract is not an employee relationship. The ATO points out that when a contract is for the production of a result the payment will normally be a fixed amount rather than being calculated using an hourly or daily rate.

4. Delegation

The freedom of a worker to delegate the work to another party is a significant factor in deciding whether someone is an employee or independent contractor. If someone is contractually required to perform the work personally then it is likely that they will be treated as an employee.

5. Risk Expose
Generally independent contractors are exposed to risk in their conduct of their own business operations. This may be in the form of being liable to rectify defects in their work or the risk of being injured in the course of carrying out their work. The fact a worker is required to hold insurance as part of the contractual terms is not sufficient to treat them as an independent contractor for superannuation guarantee purposes.

6. Tools & Equipment

While an independent contractor would generally be expected to provide most of the tools and equipment required to carry out their work, the weight given to this factor really depends on the circumstances. The courts place more emphasis on this when the capital investment required to purchase and maintain tools and equipment is high.

Other factors to consider

Above we discussed the superannuation liability which is what the ATO are concentrating on. You should also be aware that should a worker be classified as an employee then you could also be liable for other employee entitlements such as sick and annual leave. Again, just because you have agreed with a worker that they will be paid a higher hourly rate to cover these benefits the law still may deem the worker to be an employee and you liable!
Having spoken to some business owners already about this issue they become quite angry that this will hit their bottom line. I fully understand this, and in some circumstances we know of business owners who have negotiated a lower hourly rate with subcontractors to cover some of these extra on costs.
Please note that this is a guide only, if you are concerned you have any issue regarding subcontracts or require any further information please contact the office on 9207 3066 or try the ATO’s Employee/Contractor decision tool