5 Myths about Independent Contractors

For years businesses have put themselves at risk by incorrectly engaging contractors and unfortunately many commonly held and incorrect myths about contractors live on. Businesses must understand the risk of getting this wrong can be financially devastating. In this blog post we will review 5 commonly held views about independent contracting, and see whether they stand up to scrutiny.

 

1. If a person has an ABN or registered business name, they’re a contractor.

Wrong.
Having an ABN or registered business name makes very little difference as to whether the person is an employee or contractor. You should never pressure a staff member to obtain and ABN in an attempt to disguise an employment relationship as independent contracting – this is sham contracting, and can attract harsh penalties (including potential criminal responsibility in jurisdictions who have criminalised wage theft).
2. Submitting an invoice for work performed means the person is a contractor.
Wrong.
Although contractors should always invoice for their work, invoicing alone is not determinative of their status. The entire arrangement between the parties needs to be considered, particularly if the independent contractor’s invoices are based on their hours or days worked.

 

3. Employees can’t be used for short jobs or extra work during busy periods, so these workers are contractors.

Wrong.
The length of a job or regularity of work doesn’t affect whether a person is an employee or contractor. Employees and contractors can both work casually, temporarily, infrequently and during busy periods and can be hired/engaged for short jobs and specific projects. It may be that the person might be characterised as a fixed term employee, or a casual employee.

 

4. Contractors are never entitled to superannuation.

Wrong.

If payment to an individual contractor is wholly or principally for the contractor’s personal labour, then superannuation may need to be paid. A person can be a contractor under employment law, but you may still be required to pay their superannuation. The Australian Tax Office has developed a decision tool to assist employers and businesses with determining whether they need to make superannuation contributions on behalf of a contractor.

We recommend that businesses engaging contractors use this decision tool for all contractors. This is because, provided that the responses to the questions in the decision tool accurately reflect the working arrangement, businesses can rely on the result provided by as a record of their genuine attempt to understand their obligations and the result will be considered by the ATO if they review the working arrangement in the future.

 

5. If they have agreed to be an independent contractor in a written contract, that is enough.

Wrong.

Courts, the Fair Work Commission and the ATO will look beyond any written contract and examine the totality of the relationship between the parties. This is the case even in circumstances where the workers themselves consider themselves independent contractors, and wish to continue to be treated as independent contractors.

Examining the totality of the relationship will include looking at activity and behaviour after the point of contract formation. This means it is important to regularly review your contractor arrangements, particularly if the manner and frequency of work has changed over time.

The question about whether an individual is a contractor or employee will depend on the factual circumstances of each case, including circumstances that may have changed or altered from the time any written contract was drawn up.

The biggest indicator of an individual being an independent contractor is that they are truly running their own business and enterprise, and are not merely working as part of your business.

What are the consequences of getting it wrong?

Incorrectly classifying and paying a worker as an independent contractor rather than an employee can have a big impact on your business, including:

  1. unfair dismissal claims following from the termination of a contractor who is deemed to be an employee;

  2. claims for back-pay and/or entitlements as an employee;

  3. claims for payment of superannuation and fines from the ATO if a determination is reached that the business ought to have been paying superannuation for the contractor.

To avoid penalties and claims for back-pay, it is important that you get it right.

The team at Terri Bell & Co help purpose driven business owners and organisations understand their obligations and implement strategies to help future proof their workplace. We can assist you in:

  • Understanding the practical differences between employees and independent contractors;

  • Reviewing and auditing your independent contractors; and

  • Providing you with advice tailored to your business and circumstances.

If you would like assistance in reviewing your current arrangements, please contact the team at Terri Bell & Co by phone on (02) 9191 9856 or by email at info@tlbaw.com.au. Alternatively, you can book in a time to have an initial complimentary conversation with our team here.

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IMPORTANT NOTICE – The information contained in this article is not intended to be comprehensive. It is general in nature and is not intended to be used as a substitute for legal or other professional advice. You must seek specific professional advice tailored to your personal circumstances before taking any action based on this article.

Liability limited by a scheme approved under Professional Standards Legislation.

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