HG Paper: Sham contracting under the spotlight: The difference between contractors and employees, and why it matters - 8 Mar 2011

The ATO's audit activity is focusing more and more on the way remuneration arrangements are structured for 'contractors'.

According to an article in the Australian Financial Review (Recruiters may face hefty tax penalties, 7 March 2011), Tax Commissioner Michael D'Ascenzo is concerned that the remuneration arrangements in question do not comply with the 'personal services income' rules, and are ineffective for the purposes of the superannuation guarantee legislation.

The use of independent contracting as an alternative to traditional employment arrangements is clearly under the regulatory spotlight:

  • Last November, in one of the first decisions of its type, the Federal Magistrates Court found a company director and HR Manager liable for multiple contraventions of the Fair Work Act 2009's sham contracting provisions in their dealings with 10 former employees. The director and the HR manager are now exposed to liability for civil penalties of up to $6,600 each per breach (which are yet to be assessed).
  • In December last year, the Australian Building and Construction Commission also announced, and is currently conducting, an enquiry into sham contracting in the building and construction industry. Last month, the Australian Building and Construction Commissioner, Leigh Johns, told a Senate Estimates committee hearing that sham contracting was rife in some parts of the Australian construction industry, and that his office had 33 investigations and legal briefs pending.
  • Last month, the Commonwealth Government released a range of resource materials available online for intending contractors to use, providing them with a vast array of information about their rights and the applicable regulatory frameworks. At the same time, the Government announced the availability of an 'independent contractor's hotline', now staffed by Australia's principal industrial regulator, the Fair Work Ombudsman.

In Contractors v Employees: The differences and why it matters, Industrial and Employment law partner Andrew Tobin provides an overview of the regulatory considerations facing employers and principals who are engaging contractors, or considering doing so. Among other things, this paper addresses:

  • the rights of contractors. While contractors might not have access to the unfair dismissal jurisdiction, they have many other avenues available to them to challenge alleged unfair treatment (or mistreatment) by their principals;
  • regulatory considerations for principals, including compliance with the PAYG withholding requirements, the statutory superannuation scheme, State workers' compensation laws and State payroll tax laws; and
  • tax considerations for contractors.

The paper also includes a useful checklist of the relevant considerations that intending parties to a contracting agreement need to take into account.

For more information on employment issues related to independent contracting arrangements, please contact HopgoodGanim's Industrial and Employment Law practice.

Please click the download PDF button to download this paper.