When a worker asks to be a contractor

Sometimes a worker may approach your business and ask to be engaged as a contractor.

If you think the working relationship is one of employment, be very careful before agreeing to the arrangement.

Businesses that agree to incorrectly treat employees as contractors

If your business feels pressured into accepting an invalid contracting arrangement, you need to be aware you may face penalties and other charges for failing to comply with your obligations as an employer.

These penalties and other charges include:

• pay as you go (PAYG) withholding penalty for not meeting your PAYG withholding obligations, which
• in the most serious cases can be as high as 100% of the amount that should have been withheld
• may be reduced to a smaller percentage usually either 25% or 50% depending on the business's circumstances that led to the non-compliance
• super guarantee charge for not meeting your super obligations, made up of
• super guarantee shortfall amounts (amount of super contributions which should have been paid into a complying fund)
• interest
• an administration fee.

Unlike super guarantee contributions, the super guarantee charge is not deductible.

Making employment look like contracting

Sometimes workers (and businesses) go to some lengths to make an arrangement look like a contract.

If the underlying relationship is one of employment, none of these things has any bearing on the worker being a contractor:

• having a registered business name
• being able to quote an ABN
• being registered for GST
• providing tax invoices
• if the work is temporary or part-time
• if specific qualifications are required
• entering a written contract that purports to set up a contracting arrangement.

If a worker demands to be treated as a contractor

Do not agree to break the law. Use our Employee/contractor decision tool and show the worker the result. Give them a copy of this fact sheet.

Tell us about competitors who sidestep their obligations and incorrectly treat employees as contractors. We have a compliance program which aims to promote a level playing field for business.

Businesses who do not comply with their obligations to workers are often able to undercut their competitors, leading to unfair competition. When this becomes common practice in an industry, it is difficult for complying businesses and pressure mounts to join the non-compliance. We are happy to intervene to prevent this where we have good information about non-compliance. You can make a report to the Tax Evasion Reporting Centre confidentially by phone, online, fax or letter.

To find out what you need to do next, refer to How to report a business incorrectly treating employees as contractors.

We also work with industry associations to help stamp out this practice. If you are a member, contact your industry association for further information.

Do not agree to incorrectly treat an employee as a contractor. If you do, you are breaking the law and penalties and charges can be applied to your business.

Other things to be aware of

Paying super to contractors

If you pay contractors under a contract that is wholly or principally for their labour, you will have to pay super contributions for them.

Some contractors ask that their contract payments include an amount to compensate them for not receiving super guarantee contributions.

If you are required to pay super contributions for your contractors, your business has a legal obligation to make the contributions directly to a complying fund. Your business cannot contract away its legal obligations. Even if the contractor agrees to the request, your business is still liable to contribute an additional amount to a fund and can end up having to pay twice.

Giving contractors employment conditions

Sometimes workers who request to be engaged as contractors also request conditions that only apply to employment, such as the ability to salary sacrifice or to be paid tax free living away from home allowances.

Access to these conditions is a clear sign that the underlying arrangement is employment, not contracting. They rely on provisions in the fringe benefits tax law to be effective and fringe benefits tax only applies to benefits provided by an employer to their employee. Fringe benefits tax does not apply to benefits provided by a business to their contractor.

More information

Employee or contractor

For more information, refer to: Employee/contractor decision tool Employee or contractor Employee or contractor? Get the facts How to determine if workers are employees or contractors Building and construction industry - how to determine if workers are employees or contractors Common myths about the employee/contractor decision.

Employer obligations

For more information, visit Employers - home.