No Sham, are they truly independent? Independent Contractors vs Employee

Numerous small and medium-sized enterprises (SMEs) utilise the services of independent contractors like Agility Business for a multitude of reasons and throughout different stages of their operations. Similarly, employees also play a significant role in this dynamic.

As businesses evolve, so do their resource requirements, making both independent contractors and employees valuable assets at different junctures. So

• what distinguishes each,

• why is the distinction important,

• what do you need to have in place for Independent Contractors,

• and how do you avoid a Sham Contract and the hefty penalties (maximum penalty are now $18,780 for individuals and $93,900 for corporations!).

Well, let’s take a look at the recent changes of case law and regulation changes.

What Changed?

At times, the line between independent and dependent becomes blurred and in 2022 two high profile cases found themselves in the Australian High Court (Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022]) and (ZG Operations Australia Pty Ltd v Jamsek [2022]). The sitting bench at that time handed down two responses that changed the parameters for independent contractors.

The Australia Taxation Office has since responded with its’ Practical Compliance Guideline for Independent Contractors’ based on seven key criteria against a risk matrix over four zones (very low risk, low risk, medium risk, and high risk) based on actions taken by the parties entering into the arrangement (PCG 2023/2).

This guide will provide much needed clarity for businesses in how they assess, engage, liaise with, and document independent contractors.

Key Takeways

One of the key takeaways from the High Court cases and the Practical Compliance Guideline were the holistic focus of arrangements i.e. the view of arrangements in totality thus highlighting the importance of ensuring:

• there is distinct clarity in whether a person is an Independent Contractor or an Employee,

• there is consistency in whether a person is an Independent Contractor or an Employee both in writing, implied terms, and in the course of business,

• all Independent Contractors have clear written Agreements,

• Independent Contractors Agreements comply with the Australian Taxation Office Compliance standards and that also take into consideration taxation, superannuation, and reporting requirements, Independant Contractors Act, and the FairWork Act.

The key is to ensure your workers are clearly distinguished in their appropriate category or classification i.e. whether as an employee or independent contractor. Undertaking a review of categories, accounting and reporting, and their Agreements against the new guidelines is essential to maintain and improve compliance that will reduce your business risk of notices and penalties in addition to financial rectification of any contract that fails to comply.

HOW WE CAN SUPPORT YOU

If you're uncertain about whether your business complies with the new standards, has properly classified employees or contractors, or if there are inadequate Agreements and Contracts in place, reach out to us today. We can schedule a review and provide a plan to provide confidence in compliance.

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Disclaimer - This information is designed to be general business and employment information. You should seek professional advice that is based on your business circumstances prior to its use. Purchasing and/or utilising any of our templates, tools, agreements, documents does not constitute professional advice including legal advice.