Employee / Contractor Distinction
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Employee / Contractor Distinction
The classification of a worker as an employee or contractor can impact on a range of areas such as income tax, PAYGW, SG, ABN, state-based obligations. Recent High Court decisions have impacted on how this area should be approached.
Contract v Conduct
- The High court has clarified that it is necessarily to focus on the terms of the written contract between the parties to establish the character of the relationship, if that contract is an accurate and accepted record of the agreement struck between the parties.
- A wide-ranging review of the parties’ subsequent conduct is not necessary or appropriate.
- Need to consider the totality of the relationship
- The label given to the arrangement is of minimal importance.
- Workers who invest in a significant asset are more likely to be contractors
The characterisation of the relationship often hinges on two considerations.
1. Control test
- Extent to which the employer has the right to control how, where and when the work is performed
2. Business integration test
- Extent to which the worker is operating their own business as distinct from the business of the employer
Other factors
- Whether the contract is on results basis
- Delegation of work
- Risk
- Provision of Tools and equipment
- Business expenses
- Uniform
- Other
Court may look beyond a written contract and consider the conduct of the parties in circumstances where:
- The contract is an oral contract, or is partly written and partly oral to determine when the contract was formed and the contractual terms that were agreed;
- The terms of the written contract have been varied;
- The terms of the written contract are being challenged as invalid; or
- A party to the contract asserts rectification, estoppel or any other legal, equitable or statutory rights or remedies.
ATO Rulings
TR 2022/D3
The ruling explains how to determine whether a worker is an employee under the ordinary meaning of the terms and in the context of the PAYG withholding rules. The ruling specifically takes into account the High Court decision in the Personnel Contracting case.
- Where a worker engages to perform work for a business as a partner of a partnership or through a company or trust then this may indicate an intention by all parties not to create an employment relationship.
- However, a different conclusion may be reached if a worker uses an interposed entity but is also directly a party to the contract with the engaging entity.
PCG 2022/D5
The ATO has issued a draft PCG which explains how the ATO will allocate compliance resources in connection with the classification of a worker as an employee or independent contractor.
Consequences of a worker’s classification.
If the worker is treated as an employee of the engaging entity;
| Engaging entity | Worker |
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If the worker is treated as a genuine independent contractor;
| Engaging entity | Worker |
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Risk framework that will be used by the ATO for worker classification
Issues
Very low
- Evidence that both parties agreed on classification
- Evidence that both parties understand tax and super consequence
- Performance of arrangement hasn’t deviated significantly from contractual rights and obligations
- Business obtained specific advice confirming classification was correct
- Business is meeting correct tax, super and reporting obligations
Will compliance resources be applied?
- NO
Low
- Same criteria as ‘very low’
- No evidence to show both parties understood tax and super consequences
Will compliance resources be applied?
- will only be applied to determine whether the worker meets the extended definition of an employee if the ATO is responding to an unpaid superannuation query
Medium
- Evidence both parties agreed on classification
- Business obtained advice confirming classification was correct
Will compliance resources be applied?
- YES, but will be given lower priority than high risk arrangements
High
- does not fall in the very low, low or medium-risk categories.
Will compliance resources be applied?
- YES, and will be given highest priority
- Business may be subject to higher penalties if classification is wrong
Disclaimer
This content is intended for general information in summary form on tax and legal matters at the time of first publication and is not intended to provide and should not be relied upon in place of appropriate professional advice. Please consult your tax, legal and accounting advisors before acting or relying on any content provided.
