The ATO recently issued 9 guides on the distinction between employees and contractors (the Guides).
The Guides have some key messages for organisations:
This article briefly discusses these key messages.Steven Tang
At the end of July, the ATO released 9 guides and facts sheets to help organisations determine whether its workers are employees or contractors.
The distinction between an employee and a contractor is important as an organisation will have different tax and superannuation obligations depending on whether its workers are employees or contractors.
The Guides have been released in addition to the ATO's Employee/contractor decision tool, which allows organisations to answer a set of questions online to gain further guidance as to whether a worker is an employee or contractor.
You can access the Employee/contractor tool here.
An organisation must consider the whole of its relationship with the worker when determining whether the worker is an employee or a contractor. The Guides set out a number of considerations.
The table below, adapted from the Guides, sets out 6 key factors that will help an organisation determine whether a worker is an employee or contractor.
The worker is more likely to be an employee if they are 'part of your organisation'. The following facts indicate the worker is an employee.
Running his or her own organisation and providing services to your organisation.
Ability to sub-contract/delegate
The worker cannot pay somebody else to do the work.
The worker is free to sub-contract the work.
Basis of payment
The worker is paid on the basis of:
The worker is paid for the result achieved, usually based on a quote.
Equipment, tools and other assets
Your organisation provides or pays for all or most of the equipment, tools and other assets which the worker uses.
The worker provides all or most of the equipment, tools and other assets.
Your organisation is legally responsible for:
Control over work
Your organisation directs and controls the work which the worker performs.
The worker has a degree of flexibility in the way the work is performed subject to the terms of the engagement.
The worker does not operate independently of your organisation.
The worker operates his or her own organisation independently from your organisation. The worker is free to accept or refuse additional work.
Yes, the Guides contain a number of scenarios demonstrating the distinction between an employee and a contractor. These scenarios are primarily set out in the following guides:
The scenarios cover a broad range of sectors, including domestic painting, cleaning, road transport and information technology.
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The ATO identifies a number of misconceptions about circumstances that people may consider automatically make a worker a contractor. For example, the Guides point out that even if the following factors are met, the relevant worker could still be an employee:
The ATO issued a guide tailored to the building and construction industry. In that guide, the ATO identifies the following further characteristics that, in that sector, do not alone make a worker a contractor. For example, it is not determinative that:
There are also some classes of workers whom the ATO considers will always be defined as employees due to the characteristics of their role. These include apprentices, trades assistants and labourers — regardless of whether they are skilled, unskilled or semi-skilled.
The Guides are part of a combined ATO strategy of education and enforcement aimed at preventing organisations from incorrectly treating employees as contractors. As well as providing guidance as to the correct definition of a contractor, the Guides remind organisations of the penalties that apply if an employee is incorrectly treated as a contractor.
These penalties include:
The ATO cautions organisations against giving in to a worker who demands to be treated as a contractor. In that case, the ATO encourages organisations to instead refer the worker to the ATO's Employee/contractor decision tool and the Guides. The ATO also encourages an organisation's competitors to report concerns about incorrect treatments of workers.
An organisation should consider the Guides and the ATO's Employee/contractor decision tool before finalising the terms on which it engages any worker.
An organisation can arrange a contract with the employer or contractor using either the Cleardocs Standard Employment Contract or the Independent Contractor Agreement, whichever is relevant, to set out the terms of the worker's engagement. Both of these agreements can be extensively tailored to meet the needs of the organisation and the individual worker.
You can access the full Guides below:
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Employment or Superannuation teams.
You can read earlier ClearLaw articles on HR topics here.
Qualifications: BA, LLB, Monash University, LLM, University of Melbourne
Julian is a Partner in Maddocks Commercial team. He advises a diverse range of clients across the Australian commercial and financial services landscape.
Julian's corporate practice spans various sectors, including financial services, professional services, and family-owned enterprises. He advises on:
Julianís financial services practice involves advising financial market participants on the entire financial services lifecycle including fund structuring, management options, and compliance with regulatory requirements.
Julian also offers guidance on alternative and disruptive financial services businesses, such as online foreign exchanges, internal markets, and management rights schemes.
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