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Are your contractors actually employees?

Many business owners assume that if they hire independent contractors they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations.

However, each set of rules operates a bit differently and in some cases genuine contractors can be treated as if they were employees.

Two cases handed down by the High Court in March 2022 clarify the way the courts determine whether a worker is an employee or an independent contractor. The High Court confirmed that it is necessary to look at the totality of the relationship and use a ‘multifactorial approach’ in determining whether a worker is an employee.

That is, if it walks like a duck and quacks like a duck, it’s probably a duck, even if on paper, you call it a chicken.

For employers struggling to work out if they have correctly classified their contractors as employees, it will be important to review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement.

A genuine independent contractor who is providing personal services will typically be:

  • Autonomous rather than subservient in their decision-making;
  • Financially self-reliant rather than economically dependent upon the business of another; and,
  • Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.

Every business that employs contractors should have a process in place to ensure the correct classification of employment arrangements and review those arrangements over time.

Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.

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If you need assistance understanding your employment and contractor agreements, contact our commercial lawyers for a confidential discussion.
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