The quick answer
It isn’t a choice. Whether a worker is an employee or an independent contractor depends on the working arrangement, and not on what you or the worker prefer.
An ABN, an invoice or a line in the contract doesn’t settle it. The ATO lists each of these as a common myth.
Even a contractor can be owed super, where the contract is principally for their labour.
The harder part: reading your own arrangement the way the ATO would, before a problem comes up.
What the arrangement is, not what it is called
The ATO looks at the whole working arrangement: the legal rights and obligations in the contract between you and the worker. It considers who controls how the work is done, whether the worker can pass the work to someone else, how they are paid, who supplies the tools and who carries the risk.
What you call the arrangement doesn’t change the answer. In the ATO’s words:
“Having an ABN makes no difference to whether a worker is an employee or independent contractor for a job.”Australian Taxation Office, Myths and facts
The same goes for invoices, a registered business name and a contract that uses the words “independent contractor”.
Some workers are always treated as employees. The ATO names apprentices, trainees, labourers and trades assistants.
Two workers, both with an ABN, different answers
Two people each do work for a business, and each sends an invoice. One is an independent contractor. The other is an employee, and the business owes tax and super it never paid.
The difference comes down to the terms they work under: who directs the work, whether they can send someone else, whether they are paid for their time or for a result, and whose tools and risk are involved.
Six questions that decide the answer
QUESTION 1
Who controls how the work is done?
A right to direct how, where and when the work is done points one way. Freedom over the method points the other.
QUESTION 2
Can the worker send someone else?
A right to delegate or subcontract is treated differently from having to do the work personally.
QUESTION 3
Are they paid for time, or for a result?
An hourly rate and a fixed price for a finished job are looked at differently.
QUESTION 4
Whose tools, and whose risk?
Who supplies the equipment, and who pays to fix defects, both count.
QUESTION 5
Part of your business, or running their own?
The ATO asks whether the worker serves in your business or is carrying on their own.
QUESTION 6
Is the contract mainly for their labour?
If it is, super may be payable even where the worker is a contractor.
There is no single answer to any of these. Each one depends on your own situation. Working them out is what we do every day.
What getting it wrong can cost
Tax that should have been withheld, and penalties that may apply.
Unpaid super and the super guarantee charge, for the period the worker was treated as a contractor.
Entitlements under workplace law, such as leave and minimum pay, which are a separate matter from tax.
The same problem repeated for every worker engaged on the same terms.
Does this sound like you?
My workers have ABNs and send invoices.
Everyone in my industry uses contractors.
The worker asked to be a contractor.
They work only for me, on my hours.
I supply the tools or the vehicle.
I’ve never paid super for my contractors.
I’d rather know now than find out later.
If even one of these is you, it’s worth a quick conversation. Sorting it out early is almost always easier than fixing it after the ATO gets in touch.
Common questions
The worker wants to be a contractor. Isn’t that their choice?
No. The ATO says it is not a matter of choice and depends entirely on the working arrangement. We look at the arrangement and tell you how it is likely to be treated.
Do I pay super for contractors?
Sometimes. Super may be payable where the contract is principally for the person’s labour, even if they have an ABN. It depends on the terms, and we check that with you.
What if I’ve had it wrong for a while?
It can be corrected, and it is generally better to deal with it yourself than to wait for the ATO or the worker to raise it. We work out what is owed and what your options are.
How much does it cost?
It depends on your situation, so we give you the fee before any work starts. Asking for a quote costs nothing.
