Welcome to the first of a series of articles which will investigate common questions which frequently arise in the construction industry.
This series will aim to address various issues which may be of interest to industry participants at all stages of the business lifecycle.
To help illustrate this throughout the series we will follow the story of Alex who has recently commenced their career with a building company as a labourer.
Before starting with the builder, Alex had a part-time job while in school at a major fast food restaurant and it was clear that the manner of relationship was that of an employer and employee.
With the building company however, it is not as clear cut for Alex. As the business owner was a family friend, there was no formal contract, rather just a verbal arrangement.
What are the factors to consider?
To assist with determining whether an arrangement is that of an employee or contractor, the Australian Taxation Office (ATO) has released the following information to guide taxpayers in making the correct assessment of their circumstances:
| FACTOR |
EMPLOYEE |
CONTRACTOR |
| Ability to subcontract or delegate work |
An employee cannot pay someone else to do the work. |
A contractor can pay someone else to do the work assigned to them. |
| Basis of payment |
An employee is paid based on:
– Time worked
– Price per item or activity
– Commission. |
A contractor is paid based on achieving a result based on a quote provided. The quote can still be based on estimated time or pricing per item. |
| Equipment and tools |
An employee mostly uses equipment provided by the business, or when providing their own equipment, they receive appropriate reimbursement from the business. |
A contractor mostly uses their own equipment to complete their tasks for no direct reimbursement from the business. |
| Commercial risks |
An employee does not take individual commercial risk, meaning the business is responsible for work completed by the worker and is liable for rectifying any defects. |
A contractor takes commercial risks and is liable individually for the cost of rectifying any defects. |
| Control |
The business has the right to direct an employee how to complete their work. |
A contractor has autonomy in the way that the task is completed, subject to any contractual constraints. |
| Independence |
An employee does not operate independently of the business. Objectively, they would be considered to be part of the business. |
A contractor is operating their own business independently and is free to accept or refuse additional work. |
No factor above is more dominant than any of the others and, in making a determination, all six factors should be taken together.
Worked example
Let us return to the case of Alex to apply the factors.
Alex’s boss allocates work each day but provides no direction about whether Alex needs to complete it personally or whether it can be allocated to someone else by Alex.
The boss will, however, guide Alex in regards to the order and method that each task needs to be completed. If Alex makes any mistakes, one of the other labourers in the business would need to be reassigned to correct the error.
At the end of each fortnight, Alex provides an invoice to the business for payment based on 80 hours of work completed.
Alex has also purchased tools to assist completing the work on site and has not received any reimbursement for them.
Alex wears unbranded work gear. However, in the colder months he wears hoodies and beanies branded with the business name.
When applying the factors to the above, an assessment may be:
| FACTOR |
DECISION |
| Ability to subcontract |
Contractor – no direct prohibition against subcontracting. |
| Basis of payment |
Employee – payment based purely on hours and not on achieving specific result. |
| Equipment |
Contractor – Alex provides tools for no reimbursement. |
| Commercial risks |
Employee – the business corrects errors made by Alex at own cost. |
| Control over work |
Employee – the business controls order and method used for completing tasks. |
| Independence |
Employee – Alex does not identify as independent of the business and an objective person would consider them to be part of the business. |
Why is the distinction between being a contractor or an employee important?
Based on the above factors Alex is more likely to be considered in an employee relationship with the building company, despite the absence of anything more than a verbal arrangement.
This is important, as the categorisation of the arrangement can impact whether the builder is required to provide Alex with superannuation, WorkCover insurance, leave entitlements and even tax withholding from payments.
As the rules can be complicated with each of the above matters and are fact dependent, it is important that both employers (such as the building company in the above example) and workers (such as Alex) form a relationship with a trusted financial adviser to help determine each scenario.
Need assistance with determining your employment status?
It can be daunting trying to work through the rules about whether you are an employee or a contractor. However, you are not alone. The experienced tax team at LDB Group can help.
To find out more, contact us by phoning (03) 9875 2900 or sending us details via the contact form below.
