Employees vs contractors: Beware the “myths”

The difference between an employee and an independent contractor has been an issue of confusion among SMEs for some time. Of course, the different tax and related consequences that flow from whether someone is an employee or contractor are important – but to some extent, they just muddy the waters.

It’s important for SMEs to get the distinction right.

Read more: Hiring a contractor can be a nightmare dressed up as a dream

Steve Vesperman, deputy commissioner of the Australian Taxation Office, recently said there are many myths about employee/contractor arrangements and that it is important for all businesses to understand the distinction. Incorrectly treating employees as contractors is a problem in many industries, in particular the building and construction, cleaning, road transport and security industries, he said.

The ATO knows the issue is problematic and from its fieldwork, it knows many businesses are getting the employee or contractor decision wrong, and often it is a case of just not knowing what determines one from the other.

Vesperman said while most business try to do the right thing, some deliberately treat their employees as contractors to illegally lower their labour costs by not withholding tax or paying the superannuation guarantee.

The ATO has also sought to debunk some of the myths about employees and contractors.

The following are the ATO’s views in relation to some common “myths”:

Myth 1: If the worker has an ABN, they’re a contractor

ATO view: Having an Australian Business Number (ABN) makes no difference, and will not make a worker a contractor for a job. If the working arrangement is employment, whether the worker has or quotes an ABN will not make them a contractor.

Myth 2: If the worker only works for short periods, they’re a contractor

ATO view: Whether the work is short-term or irregular makes no difference and will not make a worker a contractor for a job. The working arrangement determines whether they are an employee or a contractor, not the amount of time they work for someone.

Myth 3: If others in my industry are doing the same, then my worker is a contractor

ATO view: Industry practices make no difference and will not make workers a contractor for a job. The ATO warns that businesses should not assume other businesses have worked out the employment relationship correctly – “It’s your working arrangement that determines if your workers are employees or contractors”.

Myth 4: If the contract or agreement says so, the worker is a contractor

ATO view: A contact or agreement makes no difference and will not make a worker a contractor for a job. If the working arrangement is employment, a contract or agreement stating the worker is a contractor won’t override this employment arrangement or change the obligations the business needs to meet.

Myth 5: If the worker submits an invoice, they are a contractor

ATO view: Submitting an invoice for work done or being “paid on invoice” makes no difference and will not make a worker a contractor for a job. The working arrangement determines whether they are an employee or a contractor, not whether they submit an invoice, according to the ATO.

These kinds of myths can be a powerful influence on SMEs in forming an opinion that someone is an employee or a contractor. It is therefore very important to understand the ATO’s views surrounding them.

By the way, the ATO has also updated its mobile-friendly employee/contractor decision tool to help businesses meet their tax and super obligations.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.