How to determine if workers are employees or contractors

Making employment look like contracting

Sometimes businesses will try to make a working arrangement which is employment look like contracting, so the worker can be incorrectly treated as a contractor.

Often these businesses are attempting to avoid their PAYG withholding and super obligations for the worker in order to reduce their labour costs.

If a working arrangement is employment, it cannot be overridden by trying to make the arrangement look like contracting without changing the underlying legal position.

Businesses that incorrectly treat employees as contractors and do not meet their required obligations are breaking the law and can face penalties and charges.

Australian business number (ABN)

Businesses sometimes request or pressure their workers who are employees to obtain an ABN in the belief this will make the worker a contractor.

Just because a worker has an ABN does not mean they will be a contractor for every job.

If the working arrangement is employment, whether the worker has or quotes an ABN makes no difference and will not change the worker into a contractor or alter the obligations you need to meet.

Not everyone is entitled to an ABN

When a worker applies for an ABN they will be asked a series of questions to determine whether they are entitled to an ABN.

Only individuals who carry on an enterprise can be entitled to an ABN.

If a worker provides false or misleading information when applying for an ABN they can be penalised.

For more information about the penalties, refer to Penalties for false or misleading statements made to the Australian Business Register.

Example

A school that specialises in providing language courses to students needs a language teacher to teach several of their courses and they select Evan.

The school tells Evan if he wants this work, he will need to be a contractor and they tell him to obtain an ABN.

As work is in short supply, Evan agrees to be a contractor and applies for an ABN. He provides false information so he qualifies for an ABN.

Later the ATO reviews the working arrangement and identifies Evan is an employee. As a result, the school:

• is required to treat Evan as an employee (the ABN holds no weight in the decision and does not make Evan a contractor)
• may incur penalties and other charges for not meeting the required obligations for their employee.

Evan's ABN will be cancelled and he may be subject to penalties for providing false information.

Written or oral contracts

Businesses and workers will sometimes enter into a written or oral contract specifying a working arrangement is contracting in an attempt to make a worker (who is an employee) look like a contractor.

If a worker is an employee, a written or oral contract specifying the working arrangement is contracting will not override the employment relationship or alter the obligations a business is required to meet.

Example

A restaurant business wants to reduce labour costs and decides to re-engage all the chefs and kitchen hands (who currently work in the restaurant as employees) as contractors.

The restaurant business gets each of the chefs and kitchen hands to sign a contract indicating the working arrangement is contracting.

Later the ATO reviews the working arrangements of the business and identifies the chefs and kitchen hands should be employees. As a result the restaurant business:

• is required to treat all these workers as employees again (the contract specifying the working arrangement is contracting is invalid and holds no weight in the decision)
• may incur penalties and other charges for not meeting the required obligations for their employees.