By Ken Mansell

I ordered a pizza last night and when the driver arrived, I was not wondering if I got the best deal or if the pizza was still warm, I was stuck wondering whether this young driver, in what was obviously his own, well used, car, was a contractor or an employee? He was providing his own car, but he was wearing a uniform…

And this is the problem with the employee / contractor distinction – it often is not black or white. Often some factors suggest the person is an employee and some factors suggest the person is a contractor. Worse still, if you get it wrong, you may have not withheld the correct PAYG withholding, you may not have made the correct super payments, you may not have remitted the required payroll tax, you may not have paid the correct FBT…

So how do we work out if the person is a contractor or an employee? Sometimes the question is easy.

Some workers are always employees

These include apprentices, trainees, labourers and trades assistants.

Some “workers” are always contractors

Companies, trusts and partnerships are always contractors. The people who actually do the work may be directors, partners or employees of the contractor but they're not your employees. Also, if you have obtained your worker through a labour hire firm and pay that firm for the work undertaken in your business, then your business has a contract with the labour hire firm and they are responsible for the PAYG withholding, super and FBT obligations.

And the rest are decide by considering a series of factors

The Commissioner of Taxation has an online tool and a handy table that helps in assessing if the person is a contractor or an employee:

Employee

Contractor

Ability to subcontract/delegate: the worker can't subcontract/delegate the work – they can't pay someone else to do the work.

Ability to subcontract/delegate: the worker can subcontract/delegate the work – they can pay someone else to do the work.

Basis of payment– the worker is paid either:

  • for the time worked
  • a price per item or activity
  • a commission.

 

Basis of payment: the worker is paid for a result achieved based on the quote they provided.

A quote can be calculated using hourly rates or price per item to work out the total cost of the work.

Equipment, tools and other assets:

  • your business provides all or most of the equipment, tools and other assets required to complete the work, or
  • the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.

 

Equipment, tools and other assets:

  • the worker provides all or most of the equipment, tools and other assets required to complete the work
  • the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.

 

Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.

Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.

Control over the work: your business has the right to direct the way in which the worker does their work.

Control over the work: the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.

Independence: the worker is not operating independently of your business. They work within and are considered part of your business.

Independence: the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.


But you will soon find out that often some factors say contractor, and some say employee, and you will be left worrying if you are making the correct decision…

And I know you are still thinking about the slightly warm and soggy delivered pizza and whether its handler was a contractor or an employee? It’s simple, in 2014 the Commissioner released ATO Interpretative Decision 2014/28 that states that pizza deliverers will be employees even if they use their own car. So, be sure that my pizza deliverer had PAYG withholding taken from his small pay and that if he earned more than $450 a month, he was getting super. Now to eat that pizza.

About Ken Mansell

Ken takes the label “tax nerd” as a badge of honour. He has worked for KPMG and Deloitte, as the tax counsel for ASX and NYSE listed entities, worked on tax policy for the Federal Government, as an advisor to the Assistant Treasurer, and on the secretariat of the Henry Review of Taxation. Ken runs “Tax Rambling” where he tries to share his love of tax with the rest of the world.