When is a contractor really an employee?

Fines of up to A$63,000 per breach of getting it wrong

In Australia, 23 per cent of employers say they now regularly engage contract or temporary staff – with another 44 per cent employing them for special projects – according to the 2017 Hays Salary Guide. The Australian Bureau of Statistics estimates there are one million independent contractors currently working in Australia, representing about 9 per cent of the workforce – an increase of 2 per cent in six years.

As the number of independent contractors continues to rise, so too does close scrutiny of it by watchdog agencies such as the Fair Work Ombudsman (FWO) and Australian Taxation Office (ATO).

In 2018, the FWO has reported that the misclassification of employees as contractors is a persistent issue within many industries in Australia.

According to an FWO spokesperson the FWO has found exploitative cases of sham contracting, where businesses deliberately engaged workers as independent contractors, when they were actually part- or full-time employees. The cases involved “very serious, deliberate and systemic behaviour used to gain an advantage over competitors and resulted in large underpayments”. Migrant and young workers, in particular, may find themselves the target of sham contracting due to a number of factors, including reluctance to reach out for help for fear of losing their job, lack of awareness of workplace rights, or language barriers to properly confirm their working agreement.

Some instances of misclassifications of workers, though, have been unwitting. For instance, arrangements were either formed in partial ignorance, or began as true contractor engagements that slowly changed – unobserved and undeclared – from contractor to employee.

If someone has been engaged as an independent contractor, and the court or the Fair Work Ombudsman determines they’re really an employee, there are provisions under the Fair Work Act 2009, which enable you to be prosecuted for breach of the award, There’s a maximum fine under the Fair Work Act 2009 for a breach of the Act – up to A$63,000 per breach.

It may go further than that. Businesses may also be held legally responsible, as an accessory, if a contractor – or subcontractor – is found to be underpaying staff.

“It’s not just direct employers who can be held liable for contraventions such as underpayments,” the FWO spokesperson warns. “Any person or entity knowingly involved in contraventions could be found legally responsible.”

Put to the test

Unfortunately for businesses and workers alike, the distinction between employees and independent contractors is rarely immediately clear.

According to the FWO, there is “not a singular factor used to determine whether a worker is an employee or an independent contractor. For example, just because a worker has an Australian Business Number [ABN] or issues invoices, doesn’t automatically make the worker an independent contractor.”

ATO and FWO websites offer further information outlining the differences between employees and contractors, as well as tools to assist in determining whether a worker is an employee or contractor. Whether you’re a business or a worker, as models of employment change and contracting increases, they should be essential reading.

Workers can contact the Fair Work Infoline on 13 13 94. A free interpreter service is also available by calling 13 14 50. 

Fines and penalties

According to the ATO, businesses that don’t meet required employer obligations may face penalties and charges including:

  1. A PAYG withholding penalty for not meeting PAYG withholding obligations
  2. Super guarantee charges for not meeting super obligations, comprising: super guarantee shortfall amounts (the amount of super contributions that should have been paid into a complying fund); interest; an administration fee; and penalties up to 200 per cent in the most egregious cases.

Property depreciation tax changes passed

As part of the 9th of May 2017 federal budget, the Australian Government proposed amendments to legislation relating to plant and equipment (division 40) deductions.
The proposed changes, outlined in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 , have now been legislated after being passed by the Senate on the 15th of November 2017.
This has resulted in a change to the Income Tax Assessment Act 1997 and denies property investors from claiming income tax deductions for the decline in value of ‘previously used’ depreciating assets (plant and equipment) within residential investment properties.
The government’s intention in making this legislation amendment was to deliver an integrity measure which addressed concerns that some plant and equipment assets were being depreciated by successive property investors in excess of their actual value.
These changes affect investors who purchase second-hand residential properties after 7:30pm on the 9th of May 2017 by limiting the depreciation they can claim on existing plant and equipment assets.
The following video has been prepared by BMT Quantity Surveyors to explain the changes.

Technicality confusing business buyers & sellers

Are you getting ready to sell your business? Do you understand the difference between your business and your company? It is a technicality that is catching many business owners unawares, but can have big ramifications for your financial future.

Whether you are just starting out in business or have been in business for 30+ years, it is important to understand the difference between the business that you operate compared to the entity that owns the business.

The business is generally all of the parts that are required to operate the business, including the intellectual property, the plant and equipment, the supplier lists and all other aspects of the business.

Why does this matter?

This distinction is important because when you are selling your business, you are generally not selling the company or entity that owns the business.


There are a number of reasons for this, but the main reason is liability.

The best way to illustrate this point is with an example. If Smiths Holdings Pty Ltd has been operating Smiths Fast Food for 10 years, then Smiths Holdings Pty Ltd, as a separate legal entity, is responsible for everything that has happened in that 10 years. If there is a past employee that wants to make a claim or a liability to a supplier in that 10 years, the liability for that injury sits with the private company, Smith Holdings Pty Ltd.

However, a person buying Smiths Fast Food does not want to take on that liability. They were not operating the business at the time, and should not be responsible for those claims. The company Smiths Holdings Pty Ltd should be, and is, responsible.

What does this mean for the sale process?

While it is preferable to only buy a business and not a company, it is possible to buy the company that operates a business.

This is done where you buy the shares in the company that operates the business. If you choose to buy the shares in a company, there are a number of ways that you can protect yourself:

  1. Engage your accountant and lawyer to undertake an extensive review of the company’s history to try to ensure that you identify any skeletons in the closet.
  2. Have the former owner provide you with ‘warranties’. A warranty is a promise that someone makes to you that they have disclosed an aspect of the company to you. For instance, you might seek a warranty that there a no injury claims by any employee of the company. If it turns out that an employee was injured six weeks before you bought the company and they make a claim for compensation, then you can seek your loss against the seller.
  3. One of the weaknesses of a warranty is that if you suffer a loss, you have to claim that against the seller. If you put some money aside as a ‘retention’ for a set period of time, generally you can access those funds more efficiently.

When you are ready to sell your business, ensure that you have everything set out so that the sale process goes through as smoothly as possible.

Understanding the fundamental difference between a business and the company that owns the business is key to making sure that you can sell your business for the best possible price.


Article by Jeremy Streten – a lawyer and the author of The Business Legal Lifecycle. and contributor to mybusiness,com.au