Is it time to bring contractors in from the cold?

This article was current at the time of publication.

In business, there are potential upsides and downsides to most decisions. This certainly applies when deciding on whether to appoint a full-time employee or hire an independent contractor.

The contracting talent pool runs deeper than many might think. According to a survey for a Victorian Government inquiry into the on-demand workforce, New South Wales has the highest level of gig economy workers at 7.9 per cent, followed by Victoria at 7.4 per cent. Approximately one million self-employed Australians work on a project basis rather than in permanent jobs.

Contractor pros and cons

There are various reasons for their appeal to employers. Self-employed workers are temporary, meaning they’re often available to start work in shorter timeframes. Contractors and freelancers are usually proficient in specialised fields, making them a good choice for niche tasks requiring a fast turnaround. However, the clincher is often that, almost without exception, contractor fees will not include holiday pay, sick leave, insurance, office space, equipment or other benefits usually associated with full-time employment, such as training.

Of course, increased flexibility can work both ways. Full-time employees may be more committed to their employer, whereas a contractor will always be a free agent. In the same way that it can be easier for employers to cut ties with contracted workers, they too can up and leave at any time.

Compounding the issue is the fact that the distinction between contractors and employees is not clear-cut (courts look at the totality of the relationship, as there is no single indicator to determine if a person is a contractor or an employee). Indeed, it can be complex, and the Australian Taxation Office (ATO) and Fair Work Ombudsman (FWO) closely monitor compliance.

The ATO advises all businesses to check their circumstances against its online decision tool, which, it assures, can be relied on for tax and super purposes.

According to the FWO, while the Fair Work Act 2009 affords some general protections to contractors, all businesses must pay employees superannuation and meet PAYG withholding tax obligations. Should they try to get around these, the courts may impose a penalty of up to $12,600 for individuals and $63,000 for corporations, per contravention.

In particular, the ATO is clamping down on businesses that force workers to be contractors with so-called sham contracts in order to circumvent their legal entitlements.

The role of accounting practitioners

Negligence or naivety is no defence, and according to Karen Gately, founder of business consultancy Corporate Dojo, accounting practitioners have a key role in helping clients to understand the differences between a contractor arrangement and an employer’s obligations for an employee.

Gately says that what evolving, changing and growing businesses need today may be very different from what they need in 12 months’ time, and that a trusted adviser is ideally placed to help clients understand how they can leverage interim capabilities or resources to achieve financial objectives and build financial strength.

Despite growing scrutiny of contracting arrangements by the watchdog agencies, Gately has not noted any decline in demand for a flexible workforce, even though accessorial liability laws can potentially hold employers legally responsible if, for example, one of their contractors underpays staff.

“Employers might be a bit nervous, but I doubt they’re moving away from contracting,” Gately says. “Some get into trouble because they think the contractor solution is a way to minimise investment in a [full-time] workforce, even though the nature of employment is not a contract because it is ongoing with predictable hours. I don’t see massive change yet, as dialling resources up and down to meet ebbs and flows is an incredibly important part of business.”

How to build a committed on-demand workforce

Gately believes it is entirely possible to create an engaged and passionate workforce through contract relationships, although it is “unquestionably harder”.

“My gut feeling is that most don’t do that particularly well,” she adds. “It is bizarre how often employers will not treat contractors as part of the team and do things like not bothering to invite them to the Christmas party. The value you get from contractors comes down to how energised they are and how they choose to behave. If they feel valued and you’re doing the right thing by not trying to minimise their entitlements or circumvent employment laws around procedural fairness, they are far more likely to put their heart and soul into getting a job done.”

Although convinced a permanent relationship is inessential to building engagement, Gately emphasises that setting a clearly defined outcome beforehand, and determining the best way to resource it, is. It may well make better commercial sense to invest in a full-time employee, despite the overheads.

“It could be a false economy to go with a contractor because your hourly rates are likely to be higher – you might be avoiding super or other benefits or payments you would otherwise need to make, but are you really saving money? Sometimes, though, there is a real need for flexibility, and that’s why some employers are prepared to go down that path and pay a higher per hour unit rate.”

Employee or contractor?

According to the ATO, employers need to ask the right questions to determine if a worker is an employee or contractor. Consider the following:

• Ability to subcontract/delegate: can they pay someone else to do the work?

• Basis of payment: are they paid based on an agreed quote they provided?

• Equipment, tools and other assets: do they provide their own tools and equipment needed to get the job done?

• Commercial risks: are they legally responsible for their work and liable for fixing mistakes or defects?

• Control over the work: do they decide how the work gets done subject to specific terms in the contract or agreement?

• Independence: do they operate their own business independently of your organisation?

If the answer is no to some or all of the above, it is likely they are an employee, and it is important to seek further advice if you want to treat the worker as a contractor. Getting it wrong will put your organisation at risk of penalties and charges.