When an employer is looking to take on new workers, they must determine whether these people will be employees or independent contractors. This classification is important because employees are afforded many entitlements that contractors are not. If you incorrectly classify as a worker as an independent contractor when they are in fact an employee (or vice versa), the Fair Work Commission or Federal Court may order you to pay:

  • fines; and
  • superannuation plus other entitlements on top of what you have already paid.

In this article, we explain how to use the three tests available to determine the classification of your workers, and the strengths and limitations of each.

Using the Tests

There are three helpful tests that can help you figure out whether your worker is an employee or contractor. They are the:

  1. Australian Government Employee or Independent Contractor Decision Tool;
  2. Australian Tax Office (ATO) Employee or Independent Contractor Test; and
  3. ATO Superannuation Test.

Keep in mind that there are many differences between employees and contractors, and these tests are only starting point. There is no single indicator that your worker is one or the other. Ultimately, you should seek legal advice from an experienced employment lawyer.

Why Use These Tests?

The purpose of doing these tests and recording the results is risk mitigation. If a dispute does arise, it will be advantageous to show the court you have put effort into ensuring you classified your workers correctly.

Using these tests yourself can also help to ensure that you do not end up with an illegal sham contracting situation.  

What Do the Tests Look At?

The tests look at the combination of various factors to determine whether a worker is an employee or contractor. Relevant factors include:

  • How much control does the person have over the work they do?
  • Are hours of work set?
  • Is there an expectation of ongoing work?
  • Is superannuation payable?
  • Do they own their own tools and/or equipment?
  • How are they paid?
  • Is income tax deducted from payments?

How Often Should I Use the Tests?

We recommend doing these tests for each worker, as the results may differ from worker to worker. However, even if the tests indicate that your worker is a contractor, you may be required to pay superannuation.

1. Government Employee or Independent Contractor Decision Tool

This first test does not have legal force, but is an important first step to take in determining whether your workers are employees or independent contractors.

It is based on court decisions, which means it takes into account what the courts consider when deciding if a worker is an employee or contractor. It asks a series of questions, and provides a report at the end with:

  • comments on each of your answers; and
  • a suggestion of whether an employee or contractor relationship exists.

Note: This test (and the other tests described below) may not be particularly useful if you have an unusual work situation or if your worker does not sit neatly within either the employee or contractor category. 

2. ATO Employee or Independent Contractor Test

You can also use the ATO employee or independent contractor test (for tax purposes). In this test, you will answer questions that indicate your tax and super obligations. It will consider multiple factors based on previous court cases to establish if your worker is an employee or contractor for tax purposes.

Keep in mind that this test does not consider your obligations for payroll tax or workers’ compensation insurance. Therefore you will need to use the links outlined in the Australian Government Employee checklist, and seek independent advice.

3. ATO Superannuation Test

The third test is the Australian Tax Office Superannuation Test. It is fairly indicative of whether your workers are employees or contractors, but it is still important to be cautious.

This test helps figure out if your employees and certain contractors are eligible for the superannuation guarantee. The questions ask about the relationship between your business and the worker.

Generally, if you pay a contractor for services that constitute at least 50% labour (including physical, mental, or artistic labour), you are required to pay superannuation. However, this will not be required if:

  • the total payment is less than $450 each month; or
  • your contractor is providing the services through a proprietary limited entity.

Key Takeaways

We highly recommend completing these tests to classify your workers as employees or independent contractors. However, bear in mind that these tests are just an indication. They are a good starting point but are by no means definitive.

If you would like legal advice on the classification of your workers and their resulting entitlements, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page. 

Jessica Anderson
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