As part of the Federal Government’s Closing Loopholes legislation, from August 26 new rules will define whether your staff can be considered employees or independent contractors/sub-contractors. In essence, the entire working relationship will need to be considered to determine the true nature of their employment.
In addition, it’s possible to have employees and independent contractors performing the same work. That’s because their employment status isn’t based on the work they do. Rather, it’s based on their individual working arrangements and circumstances. However, interpreting the new laws is still complex and we suggest you talk to us before recruiting a new employee or contractor.
In the meantime, the Fair Work Commission has provided 5 indicators that it will use to determine whether someone is an employee or a contractor. Please note, an employment or contractor agreement doesn’t need to cover all of these indicators. It is simply a list of things Fair Work will examine if a dispute arises.
- Payment
Employees are paid regardless of the quality or profitability of their work, whereas independent contractors carry the responsibility for their performance. To receive payment, contractors must invoice the employer and if they supply damaged goods or faulty services, independent contractors may not be paid.
- Insurance, Taxation, Superannuation & Leave entitlements
Employers are required to provide workers compensation insurance cover for all employees. Tax is withheld by the employer on the employee’s behalf and employees receive superannuation and paid leave.
On the other hand, contractors are responsible for having their own insurance in place. They are liable for their own income tax, GST payments and superannuation. In addition, if they are ill or go on holidays, their income stops.
- Hours worked
Unless they are employed on a casual basis, employees are expected to work set hours on specific days. While there may be KPIs in place, payment isn’t dependent on the completion of a task or set of tasks.
On the other hand, contractors work their own hours without the need to inform their employer of when or where they will be working. In most cases, payment is received when specified tasks are completed
- Supply of tools and equipment
Employees are usually provided with the tools and equipment they need to complete their work. Alternatively, they may be given a tool allowance so they can supply their own equipment. Independent contractors pay for and supply their own tools and equipment.
- Expectation of continuing work with same employer
While there can be exceptions, typically employees are assured of continuing work, with the same employer. That’s not the case for independent contractors. They are usually engaged for a particular task or a series of tasks and once completed, their working arrangement is concluded. Contractors are also free to work with multiple organisations concurrently.
Beware of sham contracting!
It is illegal to:
- Call a staff member an independent contractor to reduce staffing costs by avoiding entitlements such as superannuation, sick leave and annual leave.
- Dismiss, threaten to dismiss or pressure an employee into becoming an independent contractor.
There are significant penalties for individuals or businesses who are found to be sham contracting.
The new definitions have helped but it’s still complicated
Depending on your industry, it can be difficult to determine whether you are engaging an employee or an independent contractor. That’s why we always recommend business owners come to us for advice before they begin the recruitment process. We’ll discuss the role with you to ascertain the best option and then work with you to ensure you are compliant.
For HR and recruitment services that are tailored to the individual needs of your business, contact the team at End2end Business Solutions.