In my work with small businesses, I’m often asked to advise clients if they should hire an employee or engage a sub-contractor when their business is at a stage of bringing someone else on.
And it is really important to get legal advice on employees and subcontractors and how the law works. Basically, it’s not straight forward – Fair Work Australia and the ATO have different definitions about what a subcontractor is. Simply put:
Fair Work – want to make sure that people are hired are hired on Fair Terms, and that they are able to access employee entitlements, which by law in Australia we have.
ATO – want to make sure that tax is paid properly on the nature of the relationship that you have. They are also concerned that people get paid superannuation in accordance with the law and that payroll tax is paid.
When you are considering bringing someone on as either an employee or subcontractor, it might be all good and well that they say they are happy to not be an employee and thay they agree to be a subcontractor with you at that time. However things can change down the track. Things can affect that person’s life. Or the relationship can sour. And if the arrangement is not clear and it’s not truly a sub contract relationship, you can find yourself before the Fair Work Commission or with penalties from the ATO.
They can deem that that relationship retrospectively, should have been an employee relationship.
So what that means is they can look back on the way that it all worked regardless of any contract that you may have had in place and decide that that person was an employee – therefore you should have been paying tax and Superannuation and they were also entitled to annual leave, sick leave and that type of thing.
If you are considering a sub-contractor over an employee, I guess the first question you need to ask yourself is; are you taking on a sub-contractor because you think taking on a new employee is too expensive? If so, you are n the realm of probably needing an employee rather than a subcontractor and you should re-think what you are going to do. If you need someone that provides a different skill that you don’t have and you don’t necessarily need them all the time. Perhaps for a particular project or only occasionally – then that is more in the realm of needing a sub-contractor.
If you think traditionally, a sub-contractor really is that, adding an additional skill to your business that you don’t have.
Think about builders, for example. You engage a builder to build your house. But that builder doesn’t offer plumbing or electrical services. They engage sub-contractors, professionals that have those skills that come in and do that aspect of the job. However, as a consumer you’ve got the contract with the builder and then they go engage the specialists that they need.
Another example would be if you had a marketing business where you provide marketing advice and services. Now and then you might need a graphic designer for certain clients or for certain jobs and you might make an arrangement with a graphic designer that has their own business to provide the services together to your client.
One of the main things about engaging a sub-contractor is that they should already be operating with their own business and their own ABN.
If you find yourself encouraging someone to get an ABN to work with you, that’s one of the ATO triggers of saying ‘hang on, this should be an employee relationship’.
If you think about it, the simplest way to decide if you need a sub-contractor is to consider do they have a skill that you don’t, or are you just in a busy patch and you need to refer some work to someone else. Are you using someone who already has their own business and they are adding to your services rather than acting under your direction? It’s pretty important that you understand this and get some advice when you are thinking about this.
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