Classifying workers - what's the risk?

4 minute read  25.10.2017

For small to medium-sized businesses finding their feet, navigating what obligations are owed to workers can become a source of considerable paperwork and stress. It's important to correctly classify workers as either employees or contractors – but what's the risk of mistaking one for the other, and how can you mitigate this risk?

Navigating the obligations

It's an exciting time in the life of a small to medium enterprise (SME) when business is booming and more people are needed on the ground. But opening the doors to workers also opens your business up to legal risk.

Correctly classifying workers as employees or contractors is important because the legal responsibilities differ for each group. A key risk is misclassifying employees as independent contractors, and it's a particular challenge for SMEs who lack a dedicated legal team or HR professionals.

Employees have minimum entitlements under the National Employment Standards of the Fair Work Act 2009 (Cth). If a business mistakes an employee for a contractor, or incorrectly treats an employee that way (and as a result fails to provide employment entitlements) the worker can claim back-pay. For each breach of the legislation, penalties may also be imposed against incorporated businesses of up to $63,000, and against individuals involved in the breach of up to $12,600.

Defending a claim for back-pay can take considerable time and resources for SME owners, and a successful claim can leave an unexpected dent in business finances. For example, in 2013, an SME was fined $286,000 for unpaid entitlements of seven employees it thought were contractors.

Commonly, businesses mistake an employee for a contractor because:

  • the contract says they are a contractor,
  • the worker has an ABN, or
  • that's how 'other' organisations are running their business.

Relying on any of these methods of classification won't be defensible if your business, or you as an individual, are taken to court or the Fair Work Commission. These bodies are particularly tough on businesses that engage in 'sham contracting' by trying to disguise an employment relationship with an agreement that describes them as a contractor.

How can I mitigate my risk?

There's no single test to determine whether a worker is a contractor or an employee. However, the factors detailed below can help inform what type of relationship appears to exist in relation to a worker. It's important to note that no particular amount or grouping of these factors is conclusive – it will come down to the overall impression.

Control

Businesses have a high level of control over how, when and what work is to be performed by their employees. If your worker controls the hours they work and what organisations they work for during their engagement, they may be a contractor.

Risk and reward

Organisations bear the risks and responsibility for the actions of their employees. If your worker bears their own risk and is required to take out their own insurance, they may be a contractor.

Integration and delegation

Employees are highly integrated into a business and are personally required to perform their duties. If your worker is an integral part of the business, they may be an employee. If they can delegate or sub-contract all or most of their work, they may be a contractor.

Hours and expectation of work, and leave

Employees generally have standard or set hours and an ongoing expectation of work. If your worker can set their own hours and only expects to be engaged for a particular task or project, they may be a contractor.

If the worker can take paid leave, this indicates they are an employee (although casual employees don’t receive paid leave). It's also likely they are an employee if the business controls when they can take leave.

Payment, tax and superannuation

Employees receive regular payments for time worked rather than pay when a particular job is completed. If your worker invoices you for jobs completed this suggests they are a contractor.

Employers deduct income tax and pay the worker's superannuation contributions into a superannuation fund. If the worker pays their own tax and superannuation, they may be a contractor.

Equipment and tools, and identification

Contractors usually provide their own tools, equipment and uniform. If your worker wears the business uniform, drives a company branded vehicle and uses business tools and equipment, they may be an employee.

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