As part of my upcoming “Business Booster” series – one of our key speakers – Neil Fairley – has kindly written this explanation on the issue of contracting.
Be aware the content of Neil’s article relates to legal area within Australia – however many of the key concepts apply equally to business owners around the world – but please make sure you seek your own legal advice on this issue – regardless of where in the world you live.
Here is the article from Neil and the team at Workforce Advisors Group:
You may engage contractors on a regular basis, or you might be a contractor yourself.
You might go about your day without ever thinking: ‘What IS an independent contractor?’
In doing so, you might be exposing your business to significantrisk.
Because if there’s one thing that’s certain about independent contracting, it’s that this is NOT a simple question.
There is no easy answer. And it’s vitally important that you KNOW whether you’re engaging independent contractors, or whether your workers are employees by another name.
Because as you well know, there are different obligations owed to these two types of workers, and getting them mixed up can be a recipe for disaster.
SO WHAT IS NOT AN INDEPENDENT CONTRACTOR?
Lots of people think that merely having an ABN is sufficient to make a contractor, but this is flat-out incorrect.
Think of it this way: every contractor has an ABN, but not everyone who has an ABN is really a contractor for tax purposes.
An ABN does not automatically make the individual compliant with the Personal Services Income legislation, and instructing an employee to get an ABN does not automatically turn them into an independent contractor.
The same is true for individuals operating through interposed entities like a company or family trust. Even if done with the best of intentions on the part of both employer and employee, these arrangements can be construed as sham contracting and both parties could be exposed to serious risks.
SO WHAT IS AN INDEPENDENT CONTRACTOR?
Unfortunately, this is still not a question with an easy answer.
One way of looking at it is the old saying that employees are engaged under a ‘contract OF service‘ while independent contractors are engaged in a ‘contract FOR services‘.
This expresses a key difference between employees and independent contractors: employees work under the control of the employer, usually using their employer’s equipment, wearing their uniform, working the hours they set, having received training from them.
As part of this type of arrangement, an employer is obliged to provide coverage for workers compensation, to comply with applicable awards and agreements, to withhold tax from the wage/salary, and to contribute superannuation and other employee related obligations.
An independent contractor, by contrast, is self-employed: they run their own business, they are contracted to provide particular services, they will usually have their own equipment and uniforms, and they are generally engaged to produce a result, not work a set number of hours.
As a result, they have more control over their own work than an employee, and this is one key distinction between the two types of engagement.
Looking at it this way, it can be easy to spot some workers who are clearly employees, despite being called contractors (and in some cases, even thinking of themselves as contractors).
But this is just one aspect of the distinction between employees and independent contractors: the ATO, statutory bodies and the courts can look at awide range of factors in determining whether a worker is really an independent contractor for the purposes of the Tax Office, Fair Work Australia, the Independent Contractors Act, etc.
If you are looking to employ contractors, or currently do so and are not sure of the legal issues relating to this grey area – then make sure you register for the upcoming “Business Booster“series where this will be one of the major topics on the agenda.
Here is the link to the event information page: