An issue which often arises for businesses is whether a worker is an employee or a contractor. How do you determine one from the other? Does it even matter?
This distinction does matter as it impacts on who is responsible for certain issues, such as PAYG withholding tax, superannuation and workers compensation.
How do you distinguish?
To determine the status of a worker, you need to work out the true nature of the relationship between the worker and the party requiring their services. It is a relationship of employer and employee, or principal and contractor?
Often a worker will give an ABN and provide an invoice for services, which gives the impression that the worker is a contractor. However, this is not always the case. Below are some factors which help determine employees from contractors.
Generally , a worker is an employee if they:
- Are paid for time worked
- Are not responsible for providing the materials or equipment required to do their job
- Must perform the duties of their position
- Agree to provide their personal services
- Work hours set by an agreement
An independent contractor is an entity (e.g. an individual or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor:
- Is paid for results achieved
- Is free to delegate work to other entities
- Has freedom in the way the work is done
- Is free to accept or refuse work
In some situations it is clear who is an employee and who is a contractor. However, there are often cases in which the lines are blurred making it more difficult to determine. The above lists are not exhaustive and no one factor is conclusive. It is a matter of assessing all facts to determine the correct nature of a worker.
The characterisation of a worker affects a range of issues, as outlined below.
PAYG Withholding Tax
Employers are responsible for deducing income tax and superannuation from the wages of their employees.
In general, contractors are responsible for paying their own income tax if they have provided an ABN to the employer.
Employers must pay superannuation contributions for their employees to a fund designated by the employee.
Executive Lawyers will be responsible for paying superannuation for contractors where a contractor, who is a natural person, contracts under a contract that is wholly or principally for his or her labour. This is even if the contractor quotes an ABN. Generally, a contract is principally for labour if more than half of the value of the contract is for the person’s labour, which may include physical labour, mental effort or artistic effort.
Workers Compensation (NSW)
Under existing NSW law, employers must have a workers compensation policy to cover their workers. A ‘worker’ is any person who has entered into, or who works under, a contract of service or apprenticeship with an employer. This means that some contractors are considered workers for workers compensation purposes, in which case, employers need to have workers compensation policies which cover their contractors, as well as their employees.
Employers have different responsibilities depending on whether a worker is a contractor or an employee. It is important for businesses to make this distinction so they can figure out, and comply with, their legal responsibilities in relation to payment of taxes, superannuation and insurances.
For more information or assistance with characterising a worker, contact Ruth Gluckman, Gavin Parsons, Clayton Long or John Simpson on (02) 9279 4888.