Are Your Staff Actually Contractors or Employees – And Why Does it Matter?

Are Your Staff Actually Contractors or Employees – And Why Does it Matter?

Guest article by Sarah Bartholomeusz, You Legal

Staff are one of the highest costs incurred by any businesses, and they also present one of the most significant risks. Many owners think that contractors provide a more flexible solution than employees, particularly to those businesses who are just starting out, or those who require a more specific and specialised skill set to come on board, contractors absorb their own risks, making them a more attractive solution for any business, including in the allied health and fitness industry.

One of the hottest topics amongst Studio owners recently, is the confusion associated with what exactly defines contractors or employees, and the apparent confusion related to the legislative requirements. One issue that is most noticeably in the spotlight is Sham Contracting, with the Fair Work Ombudsman taking steps to stamp out the practice.

The issue of contractors vs employees is particularly relevant now more so than ever, given the Covid-19 isolation measures, which have seen gyms, and studios forced to shut down for an extended period, and who are now only just beginning to commence trade. So before you place your “help wanted” add, in preparation of getting your gym or studio back open again, you should be aware of the legal differences between an employee and a contractor, and what the potential consequences are if your business gets it wrong!

 

5 ways to distinguish a contractor from an employee:

The Australian Taxation Office (ATO) considers a variety of factors when determining whether an individual is an employee or has a contractor relationship with a business. Due to the complexity of workplace arrangements and varying circumstances, there is no concrete straight up guideline as to what is a contractor and what is an employee, as the entire relationship of the parties needs to be considered in any determination. The 5 factors below are however, pivotal elements that the ATO will look at when determining the working relationship between the parties;

1. Hours and work

If you are setting the hours that your staff work on a regulated schedule, then your business may be positioning itself as having employees rather than contractors.

2. Equipment

Contractors are required to provide their own equipment. Whilst in a gym or studio setting, providing fixed and structured equipment and dragging it in to the businesses with them and dragging it out again isn’t overly practical. Contractors must have some level of responsibility of providing their own materials. Whether that’s the music associated with their workouts, to their own phone or computer.

3. Insurance

All independent contractors should hold their own relevant insurances. This certainly doesn’t completely eliminate risk to businesses, and as a business owner it is essential that you exercise caution in this area, however in consideration of whether a staff member is a contractor or an employee, a contractor must have their own insurances.

4. Power to delegate

Contractors have the ability to delegate their tasks as they are not ultimately controlled by the business, as they would be if they were an employee. For example, and instructor could have a delegate stand in for them to run a second class simultaneously to maximize participation.

5. Payment

Contractors can generally set their own fees and are usually paid for results (such as the amount of hours worked), as set out in their quote or contract with the business. Contractors are responsible for their own personal tax obligations and do not receive the benefit of any leave entitlements paid by the business. Additionally, contractors are responsible for their own superannuation contributions.

 

What are the consequences if you get it wrong?

There are various laws surrounding the correct classification of employee and there arare three potential consequences for gym and/or studio owners, in the event that they get the classification of their employees wrong;

1. Fair Work Act

Unfortunately, as previously mentioned above, contractor relationships can sometimes be used by employers in an attempt to avoid their obligations. In the event that the Fair Work Ombudsman finds that a business is intentionally avoiding your obligations, misleading, or otherwise acting dishonestly, by directing employees to undertake work ad contractors, a fine of up to $54,000 per contract can be issued.

2. ATO

The ATO has the ability to make a determination whether your contractors are in fact employees for tax purposes, which can result in the business being liable to pay PAYG (Pay As You Go) withholding tax for the duration of their employment. Naturally, this can be a huge unexpected cost to any business and have adverse financial consequences in terms of profitability and cash flow.

3. Superannuation

Incorrectly classifying employees as contractors can have huge ramifications in terms of superannuation, under superannuation legislation. In the event that this occurs, the business will be immediately liable for all unpaid superannuation, calculated at 9.5% of their income plus interest at 10%, an administration fee as well as a superannuation guarantee of up to 200%.

Superannuation is any area that creates considerable confusion, with businesses generally holding the belief that they are not responsible for payment of superannuation for contractors. In fact, under the Superannuation Guarantee Scheme, if a contractor is paid in excess of $450 per month in any quarter for their labour, a business may be required to make superannuation contributions. The Scheme applies across multiple industries, and any business that engages contractors should check their specific superannuation obligations for each contract, and undertake a review of these obligations on a regular basis.

 

What should you do?

If you are a gym or studio owner, now is a great time to review your contracts with both your employees and contractors, to ensure that your business has correctly identified and labelled your staff. If you are unsure whether your contractor is in fact an employee, or you need some assistance in drafting a new contractor agreement, please contact us via email or schedule a call with us for an initial one on one consultation (at no cost to you!).

Sarah's Biography

Sarah Bartholomeusz is the Founder and Principal of award-winning commercial law firm, You Legal.  You Legal helps doctors legally protect their practice, patients and profits.  She has over 15 years’ experience as a lawyer, an active practice in corporate and commercial law.  Sarah is passionate about working with practice managers and owners to minimise their risks and maximise their potential.  Her clients call her the Goddess of Governance.

Sarah is the author of three best-selling books on governance including ‘Growing a Medical Practice, From Frustration to a High Performance Business’, and a TEDx speaker, she is the Chair of the Catalyst Foundation board, serves on the Entrepreneur’s Organisation’s global committee as the Governance Chair for APAC.

Her most important role is as wife to husband, Dave and mum to Alex (8) and Nicola (6).