If you are an employer looking for a contractor or if you are considering becoming one yourself, it’s critical that you understand what legal obligations contractors have as well as what sham contracting entails so that you avoid falling into illegal practices.
What is the difference between a contractor and an employee?
Someone who works under an ABN and is not employed by the firm for which they provide services is referred to as an independent contractor. They may also work for another individual or company.
In some cases, an independent contractor may run their own company and have many clients; in other situations, the independent contractor may only do work for one firm.
Contractors, compared to employees, have more flexibility, choice and control over their own schedule. They also have different responsibilities from other workforce members that they may be required to fulfil in order for the business operation to be legally compliant.
Whether you are regarded as a contractor or an employee is determined by a number of criteria. These might include:
- How much control you have over the work you are conducting for the business – the more control you have, the more likely it is an independent contractor relationship.
- If you are allowed to pick when you are working – employees have set hours in their agreement.
- If you are running your own business and can have other clients while doing the work for this particular business.
- If you are able to delegate or subcontract the work to others.
- If you are the one responsible for your work and insurances – employees are covered by their employer, contractors are responsible for organising their own.
- If you are expected to have your own equipment prepared for the work that you will be performing – employees will be provided with the equipment that they need.
- If you bear financial risk for your errors. You might have to redo the work for no pay if you get it wrong.
Do I need an Australian Business Number (ABN)?
When conducting businesses in Australia, contractors frequently use the sole trader business structure. As a result, if you’re operating as a contractor/sole trader, you must register an ABN for yourself or your business.
An Australian Business Number (ABN) identifies you and your business to the government, and helps with tax and other business-related activities. Keep in mind it’s vital to update your ABN through the ATO’s online service if your circumstances change.
It’s important to note that not everyone may be entitled to an ABN, especially if they are considered to be an employee for the work that they are performing. However, as a contractor under the sole trader model you are eligible as you are considered to be starting or carrying on an enterprise.
Additionally, for those who wish to contract you for your services, an ABN eliminates the need for them to deduct tax from you.
Having an ABN is critical to ensure you don’t lose a chunk of your income to tax before you are paid. If you don’t have an ABN and issue an invoice to a company, they’re obligated to deduct tax at the highest rate they can and declare the income you receive from them to the Australian Taxation Office (ATO).
What is sham contracting?
If you’re thinking about becoming a contractor, or you’re an employer looking to hire a contractor, it’s important to know about sham contractor agreements and how to avoid them.
A sham contractor arrangement is when an employee is told that they are an independent contractor. Even if the employee is treated like an independent contractor in some ways, such as having an ABN and issuing invoices, it’s still a sham contractor agreement.
Sham contractor agreements are illegal and are usually committed intentionally by an employer to avoid assuming legal obligations in compensation for employees.
If you’re an employer it is illegal to:
- tell an employee they are an independent contractor.
- deceive an employee into performing the same task for the employer but as a subcontractor.
- dismiss or threaten to dismiss an employee if they don’t become an independent contractor, or
- dismiss an employee and hire them as an independent contractor to do the same work.
It is important to know about the difference between employees and contractors, as well as how this can affect your business. If you are looking for a contractor or if you want to become one yourself, it’s critical that you understand what legal obligations contractors have as well as avoid falling into illegal practices like sham contracting.
If you’re an employer or contractor wanting advice on compliance for tax, super, or business obligations, get in touch with us today.