ABN Contractor or Employee – What You Need to Know
What is the difference between a contractor and an employee and whose responsibility is it to get right?
An employee…
- works in the business and is integral to that business
- has rights and entitlements under the Fair Work Act 2009
- has a reasonable expectation of ongoing work, agreed hours and duties
- is covered by the employer’s workers compensation insurance
- is paid superannuation guarantee.
A contractor…
- is actively running and advertising their own business to the public
- is responsible for their own insurance, equipment, licenses and tax
- has a high level of independence, discretion and control as to how and when the work is performed, as well as being able to delegate
- is liable to fix mistakes at their own cost
- may or may not be paid super depending on the nature of the work engagement.
It is the business owner’s legal responsibility to determine the nature of the work and the correct basis of engagement – but we can help you get it right.
Multi Factor Test
There are many factors involved in deciding whether a worker is an employee or contractor and the guidelines must be applied individually to each working relationship. There is no single overriding factor, rather, the totality of the working relationship and nature of the work being done is taken into consideration.
Sole Trader as a Contractor May Not be Right
When sole traders are engaged as contractors, the business owner needs to check whether they really meet the criteria for being engaged as a contractor. Many sole traders engaged as contractors are not actively carrying on a business, even if they have their own ABN, and do not have the level of independence that a contractor should have.
Sole traders are often engaged for their own services and labour, are not free to delegate the work to someone else and must work under the direction of the employing business. In this case, they should be engaged as an employee and not a contractor.
Factors to Consider
This is not an exhaustive list but some of the main factors to assess include:
- Is the worker engaged to achieve a specific result or are they engaged for their labour?
- Are they able to delegate their contract to another worker within their own business?
- How much choice do they have in where, when and how the work is performed?
- Who is liable to fix damages or mistakes?
- Is the service integral to the business?
- Can a sole trader have employees?
- Do they advertise services and accept work from other businesses?
Contractor or Casual Employee?
If you are not sure whether a worker is an employee or a contractor, check the ATO Employee or Contractor information first.
It’s okay to engage a worker as a contractor initially and to reassess the engagement three to six months later if the situation is unclear. However, at that point, if the worker does not meet the contractor definition, but you don’t need a permanent employee, put them on as a casual employee. This is often the best solution for both parties so that the employer is compliant with tax, super and employment laws and the worker retains some flexibility while being paid super and having tax taken care of.
The ATO and the Fair Work Ombudsman are particularly concerned with the validity of sole traders treated as contractors, as they are the workers most frequently disadvantaged by being classified incorrectly as a contractor when they in fact meet the test for being an employee.
Get it Right to Avoid Penalties
A business that should have engaged a worker as an employee will be liable for back-payment of entitlements (such as leave, overtime and allowances), and superannuation.
Some situations are straightforward to work out – but many contractor or employee decisions are not so easy with so many factors to consider.
Get in touch with us if you need help getting it right and sorting out the tax and superannuation obligations for all your workers whether contractors or employees.
12 Comments. Leave new
Hi there,
I have done work for a company and they are refusing to pay me 2 weeks after the job unless I ‘sign contracts’ all these super forms etc. I have always been paid via ABN and invoice, and I don’t know what to do now. They said they are obligated to pay super but I never agreed to that. I am a model and did one job, the job was $1000. So does that mean they falsely advertised and will be paying both my tax and super because I normally do this? I have never, ever had a client do this before. Please let me know what I can do. They are withholding my payment until I sign. I am pretty pissed off to say the least.
Hi Luna,
While we can’t give you specific advice, you may fall under the category of “Performing Artists” in which case there may be a requirement for them to withhold tax and pay superannuation.
The following ATO link may prove useful in relation to Tax Withholding Requirements- https://www.ato.gov.au/business/payg-withholding/in-detail/performing-artists-contracted-to-perform-promotional-activity/?page=2#Performing_artists
This link provides a useful tool to help determine if they are required to pay superannuation – https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=ECDTSGET#ECDTSGET
Hopefully the above helps!
Regards
Jason Paino
Hello
I’m An ABN holder , providing cleaning service, i need workers , one of them want to work join me and get paid per job as a subcontractor, is that legal ??
Hi Talal,
When hiring people or paying subcontractors to complete work for you, you need to be review the facts of the arrangement and determine whether they will actually be classed as an employee or contractor. While someone may call themselves a contractor, the facts of the arrangement may indicate otherwise, meaning you may be liable for other items like work cover and superannuation.
The following two links may provide you with helpful information regarding employees vs contractors
ATO – https://www.ato.gov.au/business/employee-or-contractor/
Fair Work – https://www.fairwork.gov.au/find-help-for/independent-contractors
All the best!
Jason Paino
Hi, I work in a voluntary Not For Profit organisation registered as an Incorporated Association in Victoria. We have two part time paid staff, each working 15 hours per week. Our employment agreements meet minimum wage standards and provide for superannuation, work cover insurance, annual leave, sick leave and carer’s leave. The funding to pay for these positions has to be applied for each year and comes from grants. We have been lucky enough to receive salary subsidies for some years through our funding sector. We are an income tax exempt charity with ATO. My question is, do we have to withhold tax, given that our funding is not taxable? Our agreements state that the employee must hold a valid and current Australian Business Number (ABN) and is responsible for their PAYG tax. Thank you.
Hi Linda,
If the staff are classified as employees rather than contractors, there would generally be an obligation to withhold PAYG from they wages, irrespective of what the employment agreement says. You can’t contract out of a legal obligation like this. It is also unlikely to matter where the funding for these positions came from, as PAYG Withholding is not and extra tax on the organisation nor does it cost you any more.
They key would appear to be in determining if they are an employee. The initial facts above appear to indicate so (you have employee agreements, they work 15 hours each week and you cover various entitlements) however you could check the below ATO link to confirm this.
https://www.ato.gov.au/business/employee-or-contractor/difference-between-employees-and-contractors/
Regards
Jason Paino
I work for the 1company under an ABN have done for sometime now.
I have recently been injured at work and am unable to work as a result the business in work for has other employees that hold the exact same position and job description the only difference being that they are employed as full time. Am I entitled to workers compensation through my employer
Hi Terrance,
Thanks for reaching out.
This article is a little out of date now with a recent high court case changing the rules. The key determination now is the subcontracting contract which if being followed, should be reviewed as this will often provide details on this issue.
If there is no contract or you are doing work that is significantly outside the scope of the contract – I suggest you contact fair work who may be able to assist.
Hope that helps!
Hi, I am a sole trader running my own cleaning business. I am looking to hire another sole trader (contractor)who works as a cleaner to complete the cleans I can not do when I am fully booked out. Do I need to have liability and work cover insurance for them, or as a sole trader themselves, are they liable for any injury or damages they may cause?
Hi Justin,
It would depend on the facts of the particular engagement. Work Safe Victoria have published guidelines which may help you in your determination. These can be found at the below link.
https://www.worksafe.vic.gov.au/resources/contractor-guideline-flowchart
I hope that helps!
Hi,
I’ve just spoken with the ATO regarding whether workers in my karaoke hosting business are contractors or employees, and whether I should be paying their Super. They tell me that they can’t legally tell me. If the ATO can’t legally decide, how can anyone else, including yourself and any business like mine?
Also, my accountant told me that if my workers are operating as a company, I am not required to pay their Super. However, information on the ATO site is contrary to this:
“Companies, trusts and partnerships are always contractors:
An employee must be a natural person. If you’ve hired a company, trust, or partnership to do the work, this is the contracting relationship for tax and super purposes. The people who do the work may be directors, partners, or employees of the contractor but they’re not your employees.”
i.e. If a host invoices me from their company, they are definitely not an employee, but…
“As an independent contractor, you can be:
an individual (sole trader) or
working in your own company, partnership, or trust.”
i.e. a host can be considered an independent contractor if they are running as a company, and…
“Superannuation obligations still may apply to certain independent contractors:
In certain circumstances, you must pay superannuation for independent contractors who are deemed to be employees for superannuation purposes.
These circumstances include if the worker:
– works under a contract that is wholly or principally for their labour
– performs work that is wholly or principally of a domestic nature for more than 30 hours per week
– is a sportsperson, artist or entertainer paid to perform, present or participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity
– is a person paid to provide services in connection with any performance, presentation or participation in these activities
”
i.e. a host who is running a company is considered an independent contractor, and if they meet the criteria for their super being paid by me (“is a person paid to provide services in connection with any performance, presentation or participation in these activities”), then I am obligated to pay their Super.
Is my accountant misinformed?
Thank you.
Hi Shaun,
First off, this article is a little out of date due to a High Court case that changed some factors in determining an employee vs contractor. The High Court case largely focused on looking at the agreement between the parties and if the actions undertaken by the parties followed the agreement. If so, the agreement would be the primary thing that determines if the worker was an employee or contractor.
Unfortunately, the ATO cannot give you advice on tax law, this must come from a Tax Agent (Accountant) or Tax Lawyer.
Generally, if a worker is engaged through an agreement with a company, partnership or trust (excluding a labour hire firm) super guarantee would not need to be paid. An example of this is Company A pays Company B to supply a worker to perform a task.
However, if your written agreement says that Company A pays Company B to supply John Smith to do the work, the individual is now part of the agreement and is potentially subject to super guarantee.
Here’s an article that may provide further clarification, page 18 deals with company or trusts – Contractor v Employee
We generally suggest to our clients (especially if this is a regular occurrence) is to get a solicitor to create a specific agreement for your business that you can use for these instances to ensure that you are covered from a super perspective.
Regards
Jason Paino