Contractors vs employees: Can you tell the difference?

23 September 2010

Are you running a business with contractors and employees? Are you sure you can explain the difference to the ATO?

A recent decision by the Administrative Appeals Tribunal (AAT) should serve as a warning for any employer who engages independent contractors. In this case, in favour of the Tax Commissioner, a company that employed over 1000 contractors to provide interpretation and translation services is now potentially liable for superannuation guarantee payments to all of its contractors - now and retrospectively.

Defining an independent contractor

So what went wrong? The problem is that there is no conclusive definition of who or what an independent contractor is. The fact that an agreement might state that someone is a contractor is considered merely a 'label' by the court. Where the contractor primarily supplies their personal labour, the dividing line between an employee and a contractor is even harder to distinguish as the tools of the contractor's trade is their knowledge and expertise.

In this case, the Tax Commissioner singled out one panel member from ATL's pool, Mr Sani, who started contracting to the company in 2003. The Tax Office was of the view that Mr Sani was an employee of ATL not a contractor and issued ATL a superannuation guarantee assessment for a shortfall in superannuation guarantee payments to Mr Sani. ATL objected. The ATO held firm on its view and has proven it's position.

Determining factors

Previously the courts have looked at a number of factors to determine if an independent contracting relationship exists:

  • Whether the work involves a particular profession or skill set
  • The level of control the contractor has over how the contract is executed
  • The ability of the contractor to delegate work to another person
  • Whether the contractor supplies his own tools or equipment
  • Whether the contractor has his own place of business
  • The contractor's ability to generate goodwill or saleable assets
  • How the contractor is paid (for hours worked or a result)
  • The level of risk the contractor bears, and
  • Whether the contractor is independent or in reality, simply 'part and parcel' of the organisation they contract to.

No single factor is determinative; it is the weight of evidence, on balance, across all of the factors. However, the last point, called the organisation test, was a significant factor in the ATL loss to the Tax Commissioner.

Weighing up the case, the tribunal found that ATL's panel members were not `only part and parcel of the business, they were the business. ATL has no capacity to deliver their services across the range of languages and geographic locations without them. Following this decision it would be hard to see how any business that relied predominantly on independent contractors to fulfil its services could establish the independence of those contractors. That is, the labour relationship is inseparable from the business function.

This case deals with independent contractors who are individuals. The use of an interposed company structure is often seen as a way of overcoming this problem (where the company represents an individual only and is the vehicle to provide their personal services) but there still may be a risk.

If you employ contractors, take a close look at the arrangements in place and whether you have a superannuation guarantee exposure. The contract is only indicative, the real test is a question of fact. If you're not sure about your position, then contact Bates Cosgrave via our contact form or on 02 9957 4033.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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