Recruiting for Fast Growth
When it comes to recruiting new staff, the use of “contractors” is often seen to be the chosen route in order to protect clients from all kinds of employment law-related responsibilities and liabilities. Many employers believe that opting to hire workers as contractors is the easy way of avoiding long-term obligations that go with hiring employees, including monthly wages, holiday pay, sick leave, and other benefits. Although this may seem like a good idea for your business, you do need to be aware that this option is not as cut and dried as it sounds.
Your worker is not automatically a contractor just because you give them that title and pay them an hourly rate. Under employment law and the rules of taxation, there is a possibility that your contractor is actually an employee. The tax, super, and other government obligations are different depending on whether the working arrangement is employment or contracting. If you choose the wrong arrangement and fail to meet your obligations, you risk being hit with penalties and charges.
Engaging a new worker
Treating your worker as a contractor because you only need them during busy periods will not make the worker a contractor. If you do engage a worker incorrectly as a contractor when they are an employee, you will need to meet the correct tax and super obligations for the worker from their start date, not just from when you realised your mistake.
It is important that you look at the whole working arrangement, including the specific terms and conditions under which the work is performed. In particular, you need to consider six factors:
ability to sub-contract/delegate
basis of payment
equipment, tools, and other assets
commercial risks
control over work
independence.
There is no single factor that will be conclusive in determining whether the worker is an employee or contractor.
Ability to sub-contract/delegate
Does the agreement or contract give the worker the right to pay another person to do the work instead of them? A contractor who cannot do the work or prefers not to can organise for another person to do it (substitution), and your business will pay that other person. The characteristic of an employee is a worker who cannot sub-contract/delegate the work if the contract requires them to personally perform the work.
Basis of payment
Paying a set amount per period is a feature of an employee.You pay your workers a set amount per period if they are paid, for example, an annual salary or an hourly or weekly rate (which is paid regularly)for the time that they work.
Equipment, tools, and other assets
Who is responsible for providing the equipment or tools necessary to perform the work? If your business is responsible for providing most or all of the equipment or tools, then it is more likely that the worker is an employee. If your worker provides all or most of the equipment or tools needed to perform the work, but your business provides the worker with an allowance or reimburses them for the costs, they are likely to be a contractor.
Commercial risks
Who bears the legal risk and is liable for rectifying, at their own expense, any defect in the work performed? A worker who does not take commercial risks is usually classed as an employee. A worker takes commercial risks if they bear the legal risk for the work and are responsible for defects in the work performed and have to rectify any defect (or pay to have the defect rectified) - such a worker would be a contractor.
Control over work
Does your business control the way the work is done? Your business controls the way the work is done if your business has the right to direct (i) what work the worker performs, (ii) where the work is done, (iii) how the worker carries out the work, and when the worker completes the work (for example, during set business hours). If the worker can decide the way the work is done (subject to any terms and conditions in the contract or agreement), it is likely a contractor arrangement.
Independence
Does the worker operate independently from your business? A worker is not operating independently from your business if they work within and are considered part of your business. In this arrangement, only a single business is being operated—yours. If this is the case, then it is an employee arrangement.
What should I do next?
When trying to gauge whether your worker is an employee or contractor, make sure you do not get caught out by the common myths around, including having an ABN, common industry practice, past use of contractors, short-term work, paying super, etc. Get in touch with us at You Legal, and we will be happy to answer any questions regarding the newsletter and provide guidance and advice with your recruitment plans where we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.