Contractors vs employees: What is the legal difference between the two and why you need to know?
O*NO! Your worker bees are essential to the smooth running of your business and you couldn’t do without them; but are your worker bees considered to be employees or contractors under the law. Does it even matter though? Yes! Your legal obligations relating to an employee are significantly different to a contractor and, as with all things legal, if you breach employment laws there are penalties!
Why you need to sit up and pay attention?
Legals are in every facet of business and life in general, but you may not realise how much your daily life is entrenched in the law until you’re pulled up for doing something wrong – something you may not have even realised was unlawful. And if you watch the news you’ll know that breaching the law can result in a slap on the hand to a loss of livelihood. Scary huh? Don’t worry, we’re here to help.
The basics: what is a contractor?
Contractors (aka consultants) are self-employed, ideally a company or partnership. They are hired to perform a service at an agreed price. They are paid for the services delivered and/or results. As they run their own show, they will usually have at least one employee they can delegate work to. They provide all or most of the tools and equipment they need to perform the services. They aren’t subject to restraints and can work for the general public.
The basics: what is an employee?
Employees are engaged by the business to form part of the business. They don’t own clients or intellectual property. They can’t delegate or sub-contract their work (even if they may like to!). They get paid for time worked or by commission. All equipment, tools, office space and resources are provided to them to perform their work or they get reimbursed for using their own equipment. They are also usually subject to restraints that prevent them from working in other businesses. They are entitled to leave and superannuation.
Make sure your contractor is actually a contractor
Treating workers as contractors when they are actually employees (and therefore not providing them with legislated employee benefits and entitlements) is against the law. Not meeting legal employment requirements can mean some pretty hefty penalties, potential loss of trading licence and/or court proceedings.
Contractors can be an attractive proposition to some businesses as they aren’t subject to the same entitlements and rights as employees, plus they can give you more financial flexibility. From a legal standpoint, contractors can also be good for risk management as liability for workmanship and etc stays with them unlike an employee where the risk is the employer’s.
Sound good? If you’re thinking you may just start converting your employees to contractors – hold tight! Employees can’t be converted to contractors without significant change in how they are employed. There are many essential legal ingredients that need to fill the pot before a worker can be legally considered a contractor and simply whacking a different label on a worker’s contract is not enough. Converting employees to contractors should only be done with extreme caution.
Contractors in real estate
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 agencies feel that they have to offer contractor arrangements so they can attract and retain talent. But peeling back the layers, what is too often found in these cases is that they’re not contractors under the law at all.
What are sham contracts?
You guessed it – sham contracts are those that try to portray themselves as being contractor contracts when the arrangement ticks all the legal boxes of being an employee contract. The Fair Work Act prohibits sham contracting arrangements (aka sham contracts) as they can be a vehicle for employers avoiding giving their workers the rights and entitlements they would otherwise be entitled to and/or a way for employees to avoid paying tax. It is up to the employer to make sure they employ their workers in legal arrangements, which therefore makes the penalties for being non-compliant attach to the employers.
What are the risks?
The main risks of contractor arrangements are that no matter what your contract may state:-
both parties can be lumped with penalties by Fair Work Australia for sham employment arrangements
employees can have infringement notices imposed by the ATO for tax avoidance
if an employee runs a family trust which is found to be non-compliant as a result of tax evasion they can be fined by the ATO and made to backpay tax plus interest
employers can be pursued by Fair Work Australia for sham contracts including receiving hefty fines and being required to backpay employee entitlements such as annual leave, long service leave, and superannuation.
Having a contract that states the person is a contractor and their remuneration is inclusive of all super and other entitlements doesn’t cut it. We can’t stress this enough – it does not matter if your contract says this – it will not protect you unless you properly structure the contractor arrangement.
The biggest claim we have seen is for a sales agent who had been with an agency for many years and he bought a claim against the agency for unpaid employment entitlements and superannuation in the sum of $900k! The contractor agreement expressly stated he was a contractor, however it doesn’t matter what you call the arrangement – if it looks like a duck and quacks like a duck, calling it a chicken doesn’t change anything!
There is a large financial risk on both parties of not getting their worker arrangements legally correct.
Key Takeaways
Contractor arrangements are common in the real estate industry, however:
There is risk to the employer and worker if the arrangement doesn’t satisfy legal requirements of being a contractor;
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);
Review your work arrangements to make sure your contractors are in fact contractors - Calling it a contractor agreement without structuring it so doesn’t make it a contractor agreement; and
Large penalties and charges can apply if you get it wrong.
Your next steps
Join our webinar on Contractors versus Employees in December where we will be spilling the tips and tricks on making sure your worker arrangements are compliant including answering any curly questions you may have.
To join this exclusive member webinar and also get legal insights, tips, tricks, and a legal litmus test to check your current worker arrangements or set up a contractor regime, sign up to our REAL membership here for as little as $97/month + GST and get access now!
Our REAL Membership also provides you with our suite of legal employment agreement templates FREE as part of the membership AND you will receive a Contractor pack so you can set up your compliant contractor regime yourself!
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.