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How Can I Be Sure My Contractors ARE Contractors?

On an almost daily basis, I meet with business owners and HR advisors who tell me, “We only engage contractors; we’ve always done it this way and we haven’t really had cause to review the engagement since we began it.”

Often they are shocked when upon review, the current engagement doesn’t stack up and they are exposed to risk – namely, that their contractors are, in fact, their employees.

So, how can you be certain that your contractor engagement solution is compliant?

  1. Practice what you preach – If your contract allows the contractors to work for other clients, delegate work and accept/reject work as it suits their business requirements, make sure that you allow this to happen in practice. All too often, we find that the agreement doesn’t marry up with the operation.
  2. Review your engagement regularly – Industrial relations is one of the most ever-changing landscapes within the business community. Make sure that you have a mechanism to ensure that you capture any changes to deeming laws, the treatment of contractor payments/expenses and that you regularly apply those changes within your business.
  3. Get advice – All too often, businesses rely on their accountant or commercial lawyer for industrial relations advice. This area of expertise is so unique and complex that you truly do need to seek specialist advice.
  4. Don’t dress it up – Make sure that the offers of work you are making are clearly communicated upfront. Ensure that workers are aware of your intent to enter into a contracting arrangement before they start work.

The benefits of engaging a contracted workforce are well documented: flexibility for both parties, remunerate and incentivise for results, increased productivity, scalability and independence. BUT, make sure that you aren’t attempting to misclassify your workforce without considering the contractor vs employee debate, or it could cost you.

What happens if I get it wrong?

Besides the sham contracting penalties imposed by the Fair Work Ombudsman, which are $51,000 per contravention, you could also be exposed to other contractor obligations, such as:

  1. The ATO has powers to look back into unpaid PAYG for 4 years.
  2. The ATO has powers to look back into unpaid Superannuation right back to 1992.
  3. The ATO has powers to look back into unpaid Fringe Benefits Tax for 3 years.
  4. The Office of State Revenue has powers to look back 5 years.

So roughly speaking, for a small workforce of ten contractors who you wrongly classified as contractors when they were really employees – earning on average $100k p.a. for the last 5 years – your exposure could cost you:

  • PAYG: $3.85 million (using highest marginal tax bracket)
  • Super: $475K (conservatively + interest + penalties)
  • Payroll Tax: $250K (conservatively + interest + penalties)

Of course, this doesn’t mean that you can’t engage in legally compliant contracting arrangements. In fact, at Certica®, we are such passionate advocates of contracting that we offer FREE, no obligation engagement assessments for your business.

We believe that businesses and individuals have the right to engage in legally compliant contractor arrangements. Contracting delivers great benefit to both your business and the workforce that you engage – so get it right, and keep it right.

Speak to one of our Contracting Specialists today if you are in doubt and we will help you address the risks and help both you and your workforce to leverage even more benefit from your contracting relationships.

3 responses to “How Can I Be Sure My Contractors ARE Contractors?”

  1. […] assessing whether a worker is a contractor or an employee, the reality is that work relationships sit on a continuum. At one end is the employee defined by […]

  2. […] more about how you can ensure that your contractors are contractors, not employees […]

  3. […] short video discusses the key differences between engaging contractors from hiring employees – and why it’s important to get it […]

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