Are your staff employees or independent contractors?

Employers are required to deduct tax from salary and wages paid to employees, plus they are required to pay the 9% (to rise to 9.25% from July 1, 2013) compulsory super. This is not the case for independent contractors.

But when is a person an employee or an independent contractor? The difference has for years been the subject of many cases before the Administrative Appeals Tribunal and the courts and the issue still arises today.

Generally, in most cases, it will be self-evident whether there is an employer/employee relationship or a principal/independent contractor relationship. In certain cases, however, it can be difficult to discern the true character of the contract.

A ruling from the Tax Office provides guidance as to whether an individual is an employee or an independent contractor for the purposes of the PAYG withholding provisions and mirrors another ruling which provides guidance as to who is an employee for superannuation guarantee purposes.

The key indicators include:

  • The degree of control that a person engaging another person to perform work can exercise over that person is an important factor. In an employer/employee relationship, the employer has the right to tell the employee not only what work is to be done but how and where it is done.
  • If the substance of a contract is to “produce a given result”, this is a strong indication that the contract is one for services (i.e. a contractor). As a result, the work can be done by anyone (e.g. third party labour) by any means using the contractor’s plant and equipment to achieve the specified outcome.
  • If a person has to personally perform the work, this is an indication of an employee: An independent contractor, but not an employee, bears the commercial risk and responsibility for any substandard work or injury sustained in performing the work and will usually take out the appropriate insurance.

So, armed with the above information, a recent case before the AAT went over the ground again, this time in relation to drivers employed to deliver bakery products by Ferrac International.

The AAT upheld the Tax Commissioner’s assessments finding that drivers employed by Ferrac International were common law “employees” of the company and not independent contractors.

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