Written by Special Counsel Leigh Adams 

Many SME operators like to think of themselves as contracting their services to the marketplace. However, as they say “Asking ain’t gettin!” and there are 23 points that the ATO now considers when determining whether you are an employee or a contractor.

Let’s look at ten of them:

  1. Who is paying the tax? In Cassaniti FCT [2018] FCA 92 no-one paid the tax! The  ’employer’ was a company connected with an accounting practice involving the husband of the ’employee’.  The employee did not pay any tax and she argued that she was entitled to a tax credit in the amount that should have been paid by her employer, because:
  • her contract of employment showed her gross income;
  • her bank statements showed her net income;
  • her pay slips were consistent with her bank statements;
  • the company’s payroll records were consistent with her pay slips;
  • her group certificates were consistent with her employers payroll records; andfrom these facts, she successfully argued  that the “mere” non-payment by the company employer to the Commissioner of Taxation of the amounts withheld was  insufficient to support the argument of the Commissioner that no amount had ever been withheld, and that the employee was in reality a contractor with an accompanying obligation to pay tax not paid by the company.
  1. Following on from point 1, independent contractors render invoices. They usually have a written agreement with their principal setting out how and when they are to be rendered and paid and at what rate.
  1. Independent contractors can be sued for the supply of faulty services. Such a provision, again, is usually set out in their contract. It also typically sets out the procedure to be adopted if their principal alleges the supply of faulty services and how the faults are to be remedied and the ramifications for not remedying the faults to the reasonable satisfaction of the principal.
  1. Independent contractors have the right to direct how, when, where and who is to perform the work in question. The High Court in Hollis v Vabu (2001) 207 CLR 21 had a lot to say about this point.
  1. What does the contract say? Even though not determinative, the courts do look at how the parties to the relationship see themselves. If the contract refers to a principal/contractor relationship as opposed to an employer/employee relationship, this is an indicator which is taken into account.
  1. Does the contract require the person or entity to achieve a particular result? Is it subject to achieving given milestones? These indicate a relationship of principal and contractor. By contrast, if the contract provides for the labour of the worker with an hourly or daily rate of pay, then these facts correspondingly suggest an employer/employee relationship.
  1. Is the supplier of the services supplying them in the course of operating their own business? This suggests a contractor is supplying the services, not an employee. The indicators for operating their own business include:
  • the entity sources their own clients by advertising or winning tenders;
  • the entity bears the risk if anything goes wrong (previously discussed at “3” above);
  • the entity incurs expenditure in earning the income or provides their own materials or equipment;
  • the entity has other attributes of a business – for example, it may well have appropriate insurances in place like public liability insurance and director’s indemnity insurance;
  • the entity will have business compliance obligations – for example, it will have a registered business name.
  1. Can the entity subcontract the work to others or is it bound to perform them by himself/herself? The former suggests a contractor relationship and the latter suggests an employment relationship.
  1. Is there a lease or bailment? If a lease or bailment exists, then this typically indicates that the relationship is one of principal / independent contractor and not employer/employee. An example of a bailment in this context is the relationship between a taxi driver and a taxi owner. The driver pays the owner for the right to use the taxi. In the De Luxe Red, and Yellow Cabs case (1998) 82 FCR 507, it was held that the drivers in such circumstances were independent contractors.
  1. Is there continuity? An employee works set hours either by agreement or as required under a typical award. On the other hand, an independent contractor does not provide services to the business operator on a regular or continuous basis.

Take home points

The relationship between people and companies in a business context is important to get right. Getting it wrong has not only adverse implications for tax obligations and liability for faulty work, but also impacts on other related matters – such as the purchase and sale of a business and other dealings between the parties and others.

If in doubt about where you stand, please don’t hesitate to contact Leigh Adams on 02 9570 7844. Clarification means peace of mind.