Are my contractors actually employees? The good, the bad and the watch out!

O*NO! You have staff to help run your business but are they employees or contractors? Does it even matter? You may be surprised. Review your contractor arrangements to make sure you aren’t breaching employment laws!

What’s the big deal?

It’s against the law to treat staff that should be employees as contractors. Not meeting tax and super obligations, or allowing for employee entitlements, may mean some pretty hefty penalties and charges that are completely avoidable.

I have a contract that says my staff are engaged as ‘contractors’ – isn’t this enough?

No. At law, it doesn’t matter what you call an arrangement – if it looks like a duck and quacks like a duck – it’s probably a duck! While your contract might say one thing, if certain factors are present, then that staff member that you think is a contractor may actually be an employee.

Contractors vs employees – what are they?

Contractors (aka consultants) are self-employed and retained for a specific task to be done at an agreed price, generally for a set period. Payment is made in stages or once the task is completed. They run their own business and can sub-contract the work. All or most of the tools/equipment needed are provided by the contractor and they don’t receive an allowance or reimbursement for them. They are also free to work for other businesses.

Employees work in the business itself and can’t delegate/sub-contract their work. They get paid for time worked or price per activity or a commission. They’re provided with all or most of what they need to do their work or get reimbursed for the use of their equipment. They are also usually restrained from working in other businesses and spend most, if not all, of their working time working for the one employer.

Contractors can be pretty attractive as they can give your business more financial flexibility with less expense and employment compliance requirements. From a legal standpoint, contractors can be good for risk management too as liability for workmanship, etc stays with them unlike an employee where risk stays with the employer. Employees can’t be converted to contractors without significant change in how they are employed by your business including being able to clearly show how the contractor has become independent from your business. This should only be done with extreme caution.

What are sham contracts?

The Fair Work Act prohibits sham contracting arrangements (aka sham contracts) which are where workers are employed and treated as contractors but are in fact employees at law. Employers are responsible for making sure they are employing their staff correctly and not just avoiding payment of super and entitlements (or helping their staff avoid tax).

How does this apply to real estate?

Now, these contractor arrangements are very popular in the real estate industry as high performing sales agents in particular like to ‘run’ their income through their family trust for tax purposes. Many Principals feel that they have to offer this type of arrangement to their high performers so they can attract and retain talent – if they don’t offer it then that that star team member will up and leave to someone who will. Does that sound familiar?

What is the risk if I put on a contractor that should be an employee?

The main risk of these arrangements is that no matter what your contract says, the employer can be liable for employment entitlements, such as annual leave, long service leave and superannuation.

Many of our clients come to us and state they are ‘fine’ because their contract states that the person is a contractor and have a specific mention that all the payments they receive are inclusive of all super and other entitlements. We can’t stress this enough – it does not matter if your contract says that – it will not protect you.

There is also risk on the employee as the ATO could do an audit on the contractor company/trust and, if they are deemed to be an employee, all of those nice tax savings they thought they had could go out the window and turn into a huge tax bill.

To sum up – there is large financial risk on both parties to the arrangement.

Takeaway

Contractor arrangements are common in the real estate industry, however:

• There is risk to the employer and contractor if that contractor is technically an employee at law.

• Fair Work and the ATO do not look favourably on any kind of sham contracting arrangement (whether you intended it to be a ‘sham’ or not).

• If you do have contractor arrangements in your agency to retain or attract talent, be aware of the risks and go in eyes wide open.

• Large penalties and charges can apply if you get it wrong.

Your next steps

If you have any contractors in your agency who do not provide any services to other businesses, then you should review your arrangements.

For further information or if you want to have your arrangements legally reviewed, contact O*NO Legal at [email protected] or visit our template store to purchase one of our real estate specific Employment Agreement templates to ensure you remain compliant with employment legislation.

Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.