Employee or contractor? Some common myths

The ATO still finds that there are several assumptions adopted by both workers and employers when determining the tax status of a job appointment, and that employers continually rely on some inaccurate factors when working out whether a worker is an “employee” or “contractor”. Getting that assessment wrong can have significant tax consequences for employers’ tax and super obligations.

To separate fact from fiction, here are a few of the common myths the ATO says can often get both businesses and workers into hot water.

Having an Australian business number (ABN)

Myth: If a worker has an ABN they are a contractor.

Fact: Just because a worker has an ABN does not mean they will be a contractor for every job. Whether the worker has or quotes an ABN makes no difference and will not change the worker into a contractor. To determine whether a worker is one or the other, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.

Using invoices

Myth: “If a worker submits an invoice for their work, they are a contractor.”

Fact: Submitting an invoice for work done or being “paid on invoice” does not automatically make a worker a contractor. It is necessary to examine the specific terms and conditions under which the work is performed. If based on the working arrangement that a worker is an employee, submitting an invoice or being paid on the basis of an invoice will not change the worker into a contractor.

The 80% rule

Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.

Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and how a contractor:

• reports their income in their own tax return, and
• determines if they can claim some business-like deductions.

It is not a factor a business should consider when they determine whether a worker is an employee or contractor.

Registered business name

Myth: If a worker has a registered business name, they are a contractor.

Fact: Having a registered business name makes no difference to whether a worker should be an employee or contractor for a particular job. Just because a worker has registered their business name does not mean they will be a contractor for every job or working arrangement.

Paying superannuation

Myth: “My business should only take on contractors so we do not have to worry about super.”

Fact: A business may in fact be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the labour of the person, you have to pay super contributions for them.

Short-term work

Myth: Employees cannot be used for short jobs or to get extra work done during busy periods.

Fact: The length of a job (short or long duration) or regularity of work makes no difference to whether a worker is an employee or contractor. Both can be used for:

• casual, temporary, on call and infrequent work
• busy periods, or
• short jobs, specific tasks and projects.

To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.

Contracting on different jobs

Myth: If a worker is a contractor for one job, they will be a contractor for all jobs.

Fact: If a worker is a contractor for one job, it does not guarantee they will be a contractor for every job. The terms and conditions under which the work is performed will determine whether a worker is an employee or contractor for each job.

Depending on the working arrangement, a worker could be an:

• employee for one job and a contractor for the next job, or
• employee and a contractor – if completing two jobs at the same time for different businesses.

Specialist skills or qualifications

Myth: Workers used for their specialist skills or qualifications should be engaged as contractors.

Fact: If a business takes on a worker for their specific skills it does not automatically mean they are a contractor. A worker with specialist skills or qualifications can either be an employee or contractor depending on the terms and conditions under which the work is performed. Qualifications or the level of skill a worker has (including whether they are “blue” or “white” collar) makes no difference to whether a worker is an employee or contractor.

Past use of contractors

Myth: “My business has always used contractors, so we do not need to check whether new workers are employees or contractors.”

Fact: Before engaging a new worker (and entering into any agreement or contract), a business should always check whether the worker is an employee or contractor by examining the working arrangement.

Unless a working arrangement (including the specific terms and conditions under which the work is performed) are identical, it could change the outcome of whether the worker is an employee or contractor.

Sometimes a business may also have incorrectly determined their worker is a contractor. Continuing to rely on the original decision would mean the business is incorrectly treating all future workers as contractors when they are employees.

It is common industry practice

Myth: “Everyone in my industry takes on workers as contractors, so my business should too.”

Fact: Just because “everyone” in an industry uses contractors does not mean they have correctly worked out the decision. Do not consider common industry practice when determining whether work is undertaken as an employee or contractor.

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