Recent high-profile cases highlight the risk of hiring contractors who could be deemed to be employees. The Roy Morgan Research court case resulted in the federal court decision that the company's researchers, who were engaged as contractors, were deemed to be employees – hence, super guarantee was payable.
This decision has negative consequences for many small businesses that employ contractors who do not work for them full time or who provide them with basic services, e.g. training companies, medical professionals, sales companies and tourist operators. This includes any business that employs contractors who could be classified by the ATO as employees.
To help you decide whether the contractors you employ could be deemed as employees, and whether super and work rules apply (e.g. annual leave and sick leave), consider the following:
1. Delegation: Do your contractors have the right to delegate the work you give them to a sub-contractor?
2. Risk: Do your contractors bear risk of any poor workmanship or injury?
3. Assets: Do your contractors provide their own equipment and assets? Are these used to provide core or non-core services?
4. Appointment: Do your contractors advertise their own services to the public at large, e.g. on a website?
5. Hours of work: Do you work out set hours for the contractors or do they?
6. Result: Are your contractors paid per hour or per day? Has a contract been signed specifying the provision of a result, product or service?
7. Level of control: Are your contractors supervised? Or do they have full control over a specific area of your business?
It doesn't matter if your contractors operate as a sole trader, partnership, trust or company. The business structure they operate under will not protect you.
If the above test is not passed, it's likely that your contractors would be deemed as employees. Hence, the super guarantee could be payable. The ATO has unlimited power to amend previous years’ accounts. The four-year limit doesn't apply; hence the risk is extremely high. If it transpired that your contractors were deemed employees, your business as an “employer” would be liable to the super guarantee. From 1st July 2012, directors are personally liable for the unpaid super guarantee.
The financial consequences of the federal court ruling could be devastating for your business. You might argue that the rate you pay your contractors is already higher than the hourly rate you would pay them if they were employees (full time, part time or casual). The ATO does not care and will impose the super guarantee and force you to pay super on the gross amounts paid.
I recommend that you review your arrangements with all your contractors. Review the questions above and determine whether your business can pass the contractors’ test. If not, you need to consider making changes with your contractors and negotiate terms of agreement, payment rates and super rates.
This ruling takes Australia back to the 1960s and does not take into account the changing global business environment and increasing competitiveness of lower-labour countries. Sadly, it is yet another red tape for the small business community. Pardon the ranting: I have seen more red tape and less help for small businesses from governments, both state and federal, over the years. This ruling is another blow.
Let's ensure that you deal with this issue head-on – fast and furiously!