#188 - Is your contractor really an employee?
Engaging independent contractors can be a fabulous way to help you serve your clients, offering flexibility and specific expertise to meet the unique needs of your business.
But are you certain your contractors are truly that? Or could they be deemed as employees under the law?
It's a tricky distinction with significant legal and financial implications and this is a topic that has increasingly come into the spotlight in recent years. Just because an arrangement is labelled one way doesn't necessarily mean it holds legally.
Understanding Contractor Criteria
The law considers various factors to ascertain whether an arrangement is genuinely that of a contractor:
Delegation: Can your contractor delegate their duties? For someone to be classified as a contractor, the possibility of delegation must exist, even if it's theoretical.
Do they use their own equipment? Genuinely independent contractors run their own businesses, using their unique set of skills and materials to provide a service to your business.
ABN and insurance: Anyone who runs their own business must have their own ABN and insurance in place. Make sure you check this.
Exclusivity: Does a sense of exclusivity penetrate your agreement? If so, your contactor might resemble an employee in the eyes of the law.
Payment: Contractors typically issue invoices rather than being on your payroll.
All of these elements must be crystal clear in a strongly tailored, independent contractor agreement that reflects your real-life arrangement. It’s important to note that getting the distinction between contractor and employee wrong can lead to significant consequences.
Confusion with Superannuation Benefits
One particularly complex area is superannuation obligations. Under certain legislation, even genuine contractors might be eligible for superannuation benefits, meaning that if you’ve been treating an employee like a contractor, you might have to backpay all the superannuation benefits you’ve missed. For a small business, this has a huge impact on cash flow.
Ultimately, as a business owner, understanding the distinction between contractors and employees is your responsibility. As I always say, prevention is better than cure so making sure you have the right agreements in place is the best way to protect your business and grant you peace of mind, saving you from potential pitfalls later on.
Above all, I strongly encourage you to seek specialist advice from your business lawyer or accountant to make sure you are meeting your legal obligations concerning employees and contractors. As I always say, prevention is better than cure.
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[00:00:00] Tracey: Engaging independent contractors in your business can be a fabulous way to help you grow, to help you meet the needs of your clients and to move forward in business. Absolutely. If you engage independent contractors in your business, then I'm going to share some things with you today for you to have a think about just to make sure you set up properly and you're not leaving your business exposed.
[00:00:41] Hello everyone. Welcome back to the Rise Up in Business podcast. I'm so happy to be here with you today, sharing something really important. And the reason I'm diving into the topic of independent contractors and I'm asking you the question, are they actually employees, is because just because you call an arrangement one thing it doesn't make it. So there's been a lot of talk about this in the industry over the last six or so months, and particularly in relation to superannuation for contractors. And I'll come to that a little later. But first of all, I want to start with saying that make sure you set everything up properly.
[00:01:23] And by that, I mean, get the independent advice that you need, absolutely. Get the expert advice that you need to make sure that if you've got contractors, they are actually genuine contractors. That's the takeaway from today. So let's talk about it like umbrellas. We've got one umbrella to the left and one umbrella to the right.
[00:01:43] So when the law's involved, the law will look at the relationship holistically. So over on the left, we've got a contractor arrangement.
[00:01:51] There's certain criteria that the law considers when assessing Whether someone's actually a genuine contractor in your business. And over on the right, we've got another umbrella. That's the employer employee relationship. That's where employees sit. And so the law looks at some criteria there when they're considering whether someone is genuinely an employee.
[00:02:11] Now, just because you park someone under the umbrella over here on the left to say, you're a contractor. Yes, I'm a contractor. I'm so happy to be a contractor. Here's my invoice. Fantastic. That doesn't actually mean. They're a contractor. Surprise, surprise. A lot of business owners think if they are happy with the arrangement, and if the contractor is happy with the arrangement, then that makes it so.
[00:02:36] But that's actually not the case. The law started focusing on this a little while ago in the context of sham contracting because some businesses were forcing people to register for an ABN and issue invoices. Because it was cheaper and easier for the business. So what that meant was the contractor was actually a genuine employee, but they weren't receiving the entitlements that they would have been receiving if the business was treating them as an employee.
[00:03:01] So that's where this really started. What that means for small businesses now, though, is that when we are engaging someone as a contractor, we need to understand, first of all, the difference. Between genuine contractors and employees. And so you need to make sure you've got that arrangement sitting under the right umbrella, the contractor umbrella or the employee umbrella.
[00:03:22] So what are some of the things that the law is going to look at when it's considering whether an arrangement you have in place is actually A genuine independent contractor arrangement. So the first thing they're going to look at is delegation.
[00:03:39] Is that contractor in principle permitted to delegate? Doesn't mean that they have to actually delegate. Doesn't mean that it's practical that they delegate. i. e. a sole trader who doesn't have any employees, doesn't have a team, they can't delegate, there's no one to delegate to, that's not what the law looks at, the law looks at whether they're permitted to.
[00:04:01] So if you've got a clause in your contractor agreement to say you must not delegate under any circumstances you cannot delegate, well then that's a no, they can't delegate. But if there's something in your contract to say delegation is permissible, or please let me know if you're going to delegate or something like that, then that's a tick.
[00:04:19] Delegation is permitted. That's really important. It's one of the really important elements that the law looks at. Can the contractor delegate? The next one is, does the contractor provide their own equipment? Their own material. We all know that we engage contractors because they have a unique set of skills or expertise.
[00:04:36] And that's what we need in our business, which is why we're engaging them. So we make sure that they're providing their own equipment. We make sure that it's crystal clear that they're running their own business what they need to provide the services to us as business owners.
[00:04:51] This goes without saying, but I'll say it anyway, your independent contractor must. In order to be able to run their own business, they must have an ABN and their own insurance in place. Like I said, goes without saying, you can't run a business if you don't have an ABN.
[00:05:07] Independent contractors need to have their own insurance in place. Do they? Check that. The next thing the law considers when considering whether an arrangement in that of a genuine contractor is whether or not there's an arrangement of exclusivity. So the idea behind contractors is that they run their own business and they have multiple clients.
[00:05:28] They're not exclusive to you. They can and must be able to perform services for your competitors. Because they're not your employee. An employee, on the other hand, of course, there's exclusivity. They can't. They're not permitted to work for your, competitor. independent contractors can.
[00:05:45] The law will also look at payment arrangements. They will look at whether or not the independent contractor is issuing you invoices, or whether you've got them on the payroll, because that's problematic and indicates more of an employee employer relationship. What's vital here, when we're going through all of these things, is that you have a rock solid, properly tailored, independent contractor agreement in place between you and your contractor, which sets out and addresses all of the things that I've just touched on and accurately reflects the arrangement you have in place with that contractor. What are they doing for you? What are they not doing for you? How are they being paid? All of those things ought to be set out properly in a contractor agreement that's in place between your business and the contractor.
[00:06:38] Now if you have an arrangement in place where you have an individual working for you, they do issue you invoices for the work that they do, but they only work for you. They do 30 hours a week every week for you. For example, they wear your uniform. You provide their laptop. They're in your database.
[00:06:57] They're adopting your processes and systems. You're, closely monitoring the work that they're doing. You can see already just from what I've shared in this short episode that that's not consistent with the criteria that I've just explained. are important for contractors. That, my friends, has the hallmarks typical employer employee relationship.
[00:07:19] So you can see the difference. Just because you call someone a contractor doesn't mean they are if they squarely sit underneath that umbrella I talked about over here on the right, which is for employees. It's not going to be an answer to you, and it's not going to help you if you're challenged later, or if you receive a claim from somebody for unpaid entitlements for the last however many years.
[00:07:44] It's not to help you to say, Oh, but that's what we both agreed. It has to be true and honest. It actually has to still meet the criteria at law. So that's the biggest takeaway from this episode that I'd like to leave you with. Just touching on one complex issue.
[00:08:01] I'm not going to dive into it in any detail, but I just want to flag that even if you have an arrangement in place with your contractor and they are genuinely a contractor. So you've got the written agreement. You've met all the criteria that I've talked about. You've ticked all the boxes that sit under that contractor umbrella.
[00:08:19] there still are some circumstances where superannuation will be payable for that contractor. So there's legislation and what it says is even if a contractor is a genuine contractor under particular legislation, they can still be deemed to be an employee, but only for superannuation purposes. And oh my gosh, this gets so complex.
[00:08:42] It's really nuanced. But what I want to say to you is please seek specialist advice from your business lawyer or your accountant in relation to whether superannuation is payable for your contractors. You cannot afford to get this wrong. There are penalties that can be imposed if you get this wrong, as well as a claim for back pay for the superannuation that you've missed.
[00:09:05] And, um, That I don't need to tell you that is significant in terms of small business managing their cash flow. But in general terms, if you're paying your contractor for their labour, so for their time spent, like a VA, for example, and they're submitting you a timesheet to say, I've worked 10 hours this week, um, here's my invoice for the 10 hours that I worked.
[00:09:24] That generally falls within the category where you've got to pay superannuation for your contractor because you're paying for their labour, for their time. On the other hand, if your contractor is, say, a social media manager, and you're paying per month for a set number of posts and two blogs or something like that, you're not paying for their labour, you're paying for the result.
[00:09:44] And you're paying based on their skills and expertise, it's outcome based. So it doesn't matter how much time it takes them to do your X amount of agreed posts and blogs, they receive the same amount, regardless of whether it takes them one hour or 10. So you're paying on an outcomes based. In general terms, that doesn't attract the superannuation obligation.
[00:10:07] That is general terms. And I'm just sharing that with you for general information so that you have an idea. Of when this superannuation obligation applies. to your contractors. Now, if any of this is causing you to think, Ah, thanks, Tracy. I really didn't know that. I really need to check that. Please reach out to your business lawyer or your accountant.
[00:10:30] And you are welcome to contact us to brief them in on the circumstances so they can give you specialist advice. This stuff is complicated. What I will say is don't rely on what other people do because there's no guarantee they have it right. Make sure you get your specialist's advice tailored to your business and how you're operating with your contractors.
[00:10:51] I really hope that this has given you some insight into why it's important to know the difference between contractors and employees. And as the business owner, you have the legal obligation to know the difference. So you have the obligation to get this right. So if you do it once, you've got peace of mind, and then, you know, you don't have to worry.
[00:11:11] So make sure that you know the difference and then make sure if you have contractors that you engage in your business, make sure you've taken the time to satisfy yourself that yes, they are genuine contractors, and my business is not at risk, and I'm not exposed to a claim for unpaid entitlements later.
[00:11:29] Really important. With all of these things, make sure you have a rock solid legal agreement in place with your contractors that accurately reflects the arrangement you have. There's just no two ways about it. You can't shortcut this stuff. Once you have that right, and it's in place, then again, you have that peace of mind, which is what I am all about.
[00:11:51] As you know, you've heard me say it here so many times, in business prevention is better than cure, and there is just no need to leave the business exposed when there are things you can do to make sure that you're getting all of this right along the way. Thank you so much for joining me. I hope it's been helpful.
[00:12:07] Please don't hesitate to reach out, reach out via DMS on Instagram, or send us a message through the website. The links are in the show notes. I would love to hear from you and to be able to help you answer any lingering questions you might have. Thank you so much for joining me. I'll catch you next time.
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