By Ben Evans
In most jurisdictions around the world, managing co-employment and statutory risk is one of the key deliverables of a contingent workforce program. Australia has some very specific legislation that governs the relationship between organizations that engage with contingent labor and the workers.
Co-employment is the term that is used to describe the risk that a host company is exposed to if the contractual relationship with the worker is not compliant and the worker could be assessed to be an employee. Statutory risk is the term used to describe the host company’s exposure to compliance with taxation and other statutory obligations.
The challenge in providing clear and direct insight to this subject lays in the complexity of the law that governs employee vs. non-employee status and the multitude of federal and state entities that influence this process. The fundamentals of compliance from an Australian perspective are explored in this article.
Over many years of experience, the most frequent misconceptions and process errors we tend to see are:
- The worker has an ABN (company registration number) so can be legally engaged as a contractor and paid a gross amount via an invoice regardless of the circumstances of their role.
- Host companies fail to understand the difference between a sole trader company structure and a PTY LTD company structure.
- The engagement contract defines the relationship as that of client/contractor but the circumstances of engagement do not mirror the contract.
- The contract does not acknowledge deliverables and milestones.
- The contractor is treated as an employee; invited to staff parties, paid a Christmas bonus etc.
- No line of sight between the accounts payable who process the invoice and the hiring manager who engages the worker.
In Australia there are a number of tests that are used to determine whether a worker should be classified as an employee or a contractor. These tests are applied by several authorities; The ATO (federal), Office of State Revenue (state) and Fair Work Ombudsman (federal). While each test is unique, they identify similar circumstances and all aim to distinguish between a contractor and an employee. There is no single checklist that defines whether a client should engage a worker as an employs or a contractor, rather the totality of the relationship is explored, combined with case law to arrive at a decision by the authorities.
Australian Tax Office
The ATO (Australian Tax Office) is the primary body that will hold a host company accountable if the worker is incorrectly classified. These penalties will be based on non-payment of PAYG (Pay As You Go) tax obligations that would have fallen due to the ATO if the worker had been employed. Additionally the ATO will collect the non-payment of the Superannuation Guarantee, currently 9.25 percent of a worker’s gross salary together with interest and penalties.
The ATO has an online checklist.
Office of State Revenue
Each state in Australia has an Office of State Revenue, which is responsible for collecting all monies owed to the state — corporate and consumer. One of the key state revenues is payroll tax. This varies state by state but is calculated on the gross salary of all employees and “relevant contractors.” The definition of a “relevant contractor” is very much a moving target but can be summarized as:
- The contract exceeds 90 days in a fiscal year
- The worker is paid for their labor rather than for the outcomes they generate
There are a number of exceptions to these simple rules, these can be found here.
The risk to a host company in being found non-compliant with their payroll tax obligations will be the back-dated payments of the payroll tax together with interest and penalties.
Fair Work Act and Fair Work Ombudsman
The Fair Work Act (2009) (FWA) was a key election promise of the (then) newly elected Labor government and replaced Work Choices, the previous Liberal government’s legislation. The Fair Work Act is a broad piece of legislation that aims to protect workers’ rights and pay levels and to ensure that (through the ombudsman) there is a simple and accessible tribunal process to hear and resolve grievances. There was significant union influence in this legislation and as such it has particular reference to low-paid and blue-collar workers.
Within FWA there is clear provisions to protect workers from sham contracting — where a host company attempts to engage a worker as a contractor when in fact they should be engaged as an employee. It also provides protection for workers who have their jobs transitioned from permanent employment to contract work. Its intent is to slow the casualization of the Australian workforce and enhance the rights of every day workers.
The FWA fact sheet on employee vs. contracting can be found here.
The Fair Work Ombudsman has far-reaching powers, even to go so far as to shut a company down until disputes have been resolved. A fine of $51,000 per worker can also be applied for non-compliance.
Given complex legislative framework, the potential exposure to co-employment and statutory risk within Australia is high.
Ben Evans is a senior associate with Brightfield Strategies. He can be reached at email@example.com.