The answer may have long standing effects.
The directors of a company recently contacted my office seeking insolvency advice about an Australian Taxation Office (ATO) debt.
The company ran a cleaning company by engaging several contractors. Upon terminating one of their contractors, the contractor claimed they were an employee and entitled to leave, superannuation and notice in lieu, which the directors disputed. Their reasoning was that as this person issued invoices under their ABN this meant they were not an employee.
The chain of events that followed this dispute, can be summarised as follows:
- The contractor contacted the ATO, which resulted in a superannuation audit.
- The ATO deemed that given all the company’s contractors worked solely for the company they were not true contractors and therefore were employees and issued a bill for $200,000 in unpaid superannuation—including penalties and interest.
The ATO substantiated their claim with reference to the Superannuation Guarantee (Administration) Act 1992, which includes an extended definition of ‘employee’ to include a “a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”
- The directors were then forced to place the company into liquidation as it was unable to pay the $200,000 ATO debt.
- The ATO thereafter issued the directors with a director penalty notice (DPN) for the unpaid superannuation guarantee charge (SGC), making the directors personally liable for the company’s superannuation debt.
This DPN was unable to be remitted via the liquidation process as the directors had failed to report the liabilities within three months of the required lodgement dates, which made the DPN a ‘lockdown notice’ i.e. no recourse available to remit or dispute it.
The directors are now considering bankruptcy as they are unable to pay the DPN.
The above example is a timely warning to all business owners about getting the contractors versus employee position wrong.
Just because business owners consider an individual a contractor—doesn’t mean the ATO and various other federal and state government departments will agree. Obviously, you should always obtain independent advice before accepting such a determination from a government body to ensure it is correct. Unfortunately for this cleaning company, the ATO’s determination of its cleaning personnel as being employees rather than contractors is correct.
To give some guidance on whether an individual is an employee or contractor—Fair Work have outlined on its website the factors below to consider. They stress critically:
“That no single indicator can determine if a person is a contractor or an employee. Each determination is based on the individual merits of the work arrangement in place. Courts always look at the totality of the relationship between the parties when determining the status of a person’s employment.”
|Degree of control over how work is performed||Performs work, under the direction and control of their employer, on an ongoing basis.||Has a high level of control in how the work is done.|
|Hours of work||Generally works standard or set hours (note: a casual employee's hours may vary from week to week).||Under agreement, decides what hours to work to complete the specific task.|
|Expectation of work||Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period).||Usually engaged for a specific task.|
|Risk||Bears no financial risk (this is the responsibility of their employer).||Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.|
|Superannuation||Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.||Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).|
|Tools and equipment||Tools and equipment are generally provided by the employer, or a tool allowance is provided.||Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).|
|Tax||Has income tax deducted by their employer.||Pays their own tax and GST to the Australian Taxation Office.|
|Method of payment||Paid regularly (for example, weekly/fortnightly/monthly).||Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.|
|Leave||Entitled to receive paid leave (for example, annual leave, personal/carers' leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees.||Does not receive paid leave.|
If your contractors are found to be employees there is a high likelihood of substantial liabilities (including any interest and penalties for non-payment) of the following debts:
- Unpaid superannuation
- Employee entitlements
- Payroll tax
- Workers compensation.
Unfair dismissal rules and minimum wage must also be thoroughly considered.
If you have doubts about whether your contractors are employees, speak to your professional advisor.
As always, if you or your clients require any insolvency advice please contact your local Worrells office for help.