Employees vs Contractors - The changing landscape around contractor assessment
Contracting remains a well utilised employment arrangement for hotel, accommodation and associated hospitality staff. It comes with many benefits to both parties including access to flexible and mobile skills for the business, and increased earnings potential, flexibility and choice for the contractor.
However, it is essential that hotel owners and managers have clear and consistent processes in place to correctly determine whether an individual should be treated as an employee or a contractor to ensure they comply with their statutory obligations.
The changing landscape around contractor assessment
Organisations that engage with workers under contract face the difficult task of evaluating whether the worker may be considered an employee or a contractor. This distinction is important as it will influence an organisation’s obligations for matters such as superannuation, payroll tax, WorkCover insurance and pay compliance.
The ATO and relevant state revenue authorities continue to review and audit contracting arrangements closely. Where they determine that a ‘contractor’ is actually an employee, they will expect the corresponding employment tax obligations to be satisfied.
Where these obligations are not being met, organisations can expect interest and penalties to apply, and will most likely be subjected to additional ongoing scrutiny.
Even where a worker may be considered a contractor, this does not necessarily mean employment tax obligations will not arise due to the extended definition of an employee for superannuation purposes as well as contractor provisions contained within applicable payroll tax and WorkCover legislation.
When it comes to evaluating the nature of the relationship with the worker, it is not as straightforward as simply labelling them a contractor or ensuring they have a registered Australian Business Number (ABN).
Determining whether a worker is an employee or a contractor
High Court’s decisions in the Personnel Contracting and Jamsek cases in 2022 placed greater emphasis on written contracts rather than the ‘totality of the relationship’, that is, the reality of a situation in addition to a written contract. Since then, the determination of whether workers are employees or contractors has been a difficult task for all types of businesses, including hotels and accommodation businesses, to navigate. There is a lack of guidance on how the new approach of the Courts is to be applied, and the ATO has made it clear that their previous public advice is being reviewed and updated to align with the principles set by the High Court.
Despite this period of uncertainty, what is clear is that while it is the legal rights and obligations of the relationship, as presented in the contract, that is the overriding factor in answering the question of employee or contractor, the ‘totality of the relationship’ is still to be considered. In practice, this means that no single factor will be taken as determinative of the whole relationship between two parties.
The following elements are relevant to this process, but they must be considered in light of the rights and duties established under the contract:
- Legal nature of the parties involved – For instance, is the contracting party a partnership, company or individual?
- The method of remuneration – Is the worker salaried or do they invoice for their work?
- Work equipment – Is one of the parties responsible for providing and maintaining equipment?
- Control – Is the worker directed as to how work should be undertaken, the hours of work and where said work should be completed?
- Delegation – Can the worker delegate or subcontract their work?
As we await updated guidance from the ATO and potentially from other regulators and possible legislative changes, it is recommended that accommodation employers ensure contracts are prepared to reflect the actual nature of the engagement with a worker and that oral contracts are not relied upon.
In our current climate, the contract will be the primary reference for any court decision and the distinction of employee vs contractor.
How BDO can help
Contracting remains a significant area of interest for the ATO and other regulatory bodies, with errors proving both costly and time-consuming to resolve for employers.
Should you have any queries with regards to determining employee vs contractor status of your staff, improving process efficiency, or satisfying ATO compliance activities, please contact your trusted BDO adviser, who can assist you with navigating the complexity of this area.
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