It is important for an employer to determine whether he/she is employing a contractor or an employee for a designated job role, as the taxation, superannuation regulations and workers compensation entitlements are different for the two.
Broadly, people who determine their own scope of employment, have powers of delegation, are paid on performance basis, have a separate Australian Business Number (ABN) and are free to refuse and accept work, can be considered as independent contractors.
Alternatively, if a person is considered to be an employee, he or she needs to be remunerated on a fixed basis by payment of salary or wages, has to be paid leave entitlements and different tax and superannuation implications would also apply.
The risk undertaken by an independent contractor is higher than that of an employee.
The Independent Contractors Act 2006 (ICA), and the Fair Work Act 2009 (FWA), protect the rights and entitlements of independent contractors.
Depending on the requirements of your business, a business operator needs to take a decisive decision as to whether hire an employee or an independent contractor.
Considerations before Hiring a Contractor
There are several considerations to be met before you hire an independent contractor. Financially, an independent contractor is paid on performance basis or after completion of certain assignment(s). Independent contractors pay their own tax and Goods and Services Tax (GST) to the Australian Taxation Office (ATO). They generally have an ABN number and submit invoices for the work done. They are paid at the end of the contract or project undertaken. You are not obligated to make any contribution towards the independent contractor’s superannuation.
While entering into an independent contracting arrangement, you should be careful regarding sham contracting arrangements. It may intend to disguise an employment relationship as an independent contracting arrangement for the purpose of avoiding responsibility for employee entitlements. FWA prohibits an employer from illegally representing an employment contract as an independent contracting arrangement, dismissing or threatening to dismiss employees for the purpose of engaging them as an independent contractor or fraudulently inducing a person to become an independent contractor. FWA provides serious penalties in case of any such act.
The ICA was enacted to set up a national system for providing fair contractual rights and obligations for independent contractors. The ICA has replaced the local unfair contract laws in most States and Territories including New South Wales (NSW). If you are planning to appoint an independent contractor, you need to keep in mind that the terms of the contract should be fair, both parties have equal bargaining power, nobody can use fraudulent means or exercise undue influence on the other and the payment made to the independent contractor is as per the market rates.
The ICA provides serious penalties for contraventions of these provisions and any aggrieved party can request assistance from the Fair Work Ombudsman if there is any breach.
In NSW, the ICA overrides the deeming provisions of New South Wales Industrial Relations Act 1996 (NSW IR Act) which regards independent contractors as employees if they are engaged in various building and construction trades, including carpenters, joiners, bricklayers, painters, timber suppliers, plumbers, drainers, plasterers, blinds fitters, ready mixed concrete drivers or RTA lorry drivers.
The thin line between deciding an independent contracting arrangement and an employment arrangement is often blurred. Our team of experts at Owen Hodge Lawyers can guide you in this regard. We can help you decide upon and document the arrangement which perfectly suits your business needs.