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News & Knowledge

Australia: When will a contractor be considered an employee?

10th November 2016

Genevieve Lakey, Aitken Partners

It is important to know the differences between an employee and a contractor as this will affect your responsibilities, tax and super. If you incorrectly treat your employees as contractors, you risk having to pay penalties and charges. Genevieve Lakey from MSI's Melbourne law member Aitken Partners looks into the subject matter.

Under the Workplace Injury Rehabilitation and Compensation Act 2013 a contractor/worker will be deemed any employee of the hirer if a contract is:

  • Not principally for the provision of goods or equipment
  • At least 80% of the work is completed by the same individual under the contract
  • At least 80% of the contractor’s/worker’s income for services is received from the hirer

When a contractor is deemed an employee for the purpose of WorkCover claims, this has the potential to significantly impact a business’ premiums. This may apply despite the fact the contractors themselves may be paying their own WorkCover premiums. Additionally, if sufficient contractors are deemed to be employees by WorkCover the business may face an audit and penalties.

Superannuation Guarantee Act
The Superannuation Guarantee Act sets out that “if 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” for the purposes of paying superannuation. This definition encompasses many contractors who are individuals. However, it requires that if the person to whom payment is made performs the work. If a business does not pay superannuation when obliged to do so, the amount remains payable and penalties accrue from that time.

Payroll tax
Under the contractor provisions of the Payroll Tax Act 2007 if the person is a common law employee or the contract is a relevant contract under the Act, then payroll tax is payable. A relevant contract exists where a contractor provides labour services in fulfilling the contract. There are only limited exclusions to what is a relevant contract set out in the Act.
Misclassifying an individual as a contractor or failing to be aware of legislation that requires businesses to fulfill specific obligations in relation to contractors, carry significant financial repercussions.