As an employer, you may need to hire a mixture of employees and independent contractors based on your business’ needs. Contractors differ from employees as they have:
- an Australian Business Number (ABN);
- their own clients and insurance; and
- higher autonomy in their role.
You should only hire independent contractors if they have an ABN. Otherwise, you may need to consider hiring them as an employee. This article explains the key ways a contractor will differ from an employee and the legal requirements they should meet before you hire them.
What is an Independent Contractor?
Independent contractors are individuals who:
- work under their own ABN;
- are not employees of the company they work for; and
- provide agreed-upon services under a contract.
An independent contractor may have a large number of clients or may only work for one company at a time. They usually have the power to negotiate their:
- rates of pay;
- frequency of pay; and
- working arrangements.
Additionally, they may be known simply as a contractor or a subcontractor.
A genuine independent contractor will operate their own business under a registered business name. As a result, they should conduct relevant business activities, including:
- having a registered ABN and business bank accounts;
- paying their income tax and other tax obligations directly to the Australian Taxation Office;
- generating their own client base;
- delegating work to others without your approval;
- providing invoices for their services; and
- being responsible for their business insurance, such as public liability.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Payment to Independent Contractors
Since independent contractors are not employees, they do not have a minimum salary or pay rate. Instead, independent contractors frequently negotiate remuneration for the services they offer you as part of their contract.
An independent contractor will send you a separate invoice each time you need to pay them, outlining the amount due. You may need to pay them on a regular basis or once they have completed the project.
If you do not pay an invoice, an independent contractor may pursue legal action against you.
Continue reading this article below the formSham contracting
It is essential that you do not accidentally contract employees as independent contractors. If you intentionally or recklessly do so, you may be part of a sham contracting arrangement.
Sham contracting arrangements are illegal, even if you treat the worker as an independent contractor in some respects. For example, if your worker sends you invoices but they do not have a registered business of their own, the court will consider them to be an emplooyee. In this case, your contract with the worker will constitute a sham contracting arrangement and the court may impose a penalty against you. Penalties include:
- $13,320 for individuals, or
- $66,600 for corporations.
Example
A software development company, Tech1, informed a worker, Sam, that he would be an independent contractor and would need an ABN before starting work with them. The company advised him to take care of his own taxes and superannuation since it would save them money, and he would receive a higher hourly rate. Sam now uses his ABN to invoice Tech1 on a fortnightly basis
Sam informs Tech1 that he also wants to work for a different software development company. However, they refuse this because they want to ensure that he is available whenever they want his services.
As an employee, Sam has grounds to state that Tech1 misrepresented the employment relationship and engaged him in a sham contracting arrangement. He may demand that he be paid all of his entitlements as an employee and seek advice from the Fair Work Ombudsman.
Tax and Entitlements
You do not need to make tax deductions for anyone you engage as an independent contractor. Independent contractors are required by law to pay their own income tax on the money they earn. Additionally, they may be required to pay Goods and Services Tax because they provide services to others.
Independent contractors can pay their own superannuation contributions in addition to paying their own taxes. There are a few exceptions to this, such as when a contractor is employed primarily to provide labour. In this scenario, you, as their hirer, would be liable for paying their superannuation.
Key Takeaways
As an employer, you should not engage independent contractors if they do not have an ABN. However, you may still choose to hire them as an employee, where they will receive different entitlements. If a worker does not have an ABN and you choose to engage them as a contractor, this can pose difficulties for your business, including:
- having a contract that does not accurately reflect your relationship with the contractor;
- misunderstandings around the rights and obligations of each party; and
- being liable for a sham contracting arrangement.
If you have any questions or need advice regarding hiring independent contractors, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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