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The Team at NOW bring you topics of interest to owners of small businesses. Please feel free to leave a comment or let us know if there are particular topics you'd like us to cover.

Independent Contractors or Employees

The Team - Tuesday, January 11, 2011

Independent Contractors or Employees

It is your responsibility as a small business owner to ensure that you comply with the law regarding contractors vs employees. With a few exceptions, employees now have to be paid strictly in accordance with the Fair Work Act 2009.

In many cases, businesses also legitimately engage contractors, but the ground rules on employment and contracting are changing and failure to comply with the legislation could be expensive for small businesses.

If you have any concerns about your employment practices it would be a good idea to get some assistance to ensure you comply.

Many businesses are not protected

Under the Fair Work Legislation and under the tax act you have to treat contractors and employees correctly or risk incurring fines and additional costs in back pay.

Many individuals prefer the flexibility of being paid as a contractor, and many employers strike mutually satisfactory deals with contractors which cost employers less than treating those contractors as employees.

Employers complain to us that:

a)   they can’t get people to work for them as employees and have to engage them as contractors and
b)   they’d be uncompetitive in their highly competitive market where everyone else pays their workers as subcontractors.

It’s not only the hourly rate which is at issue, there is also the matter of worker’s compensation insurance, PAYG tax, GST and superannuation and leave payments.

Sham Contracting can be expensive

Sham Contracting is where you pay people as contractors when they are really employees. The risks are substantial and you need to be aware that not only can you be fined up to $33,000 for each offence but you might receive a claim for unpaid PAYG tax and superannuation. An employee might also claim for back pay, including penalty rates, superannuation and leave entitlements.

So how do you determine whether someone is a true contractor or should be treated as an employee?

There is no definitive test to determine whether a subcontractor should be an employee and each set of circumstances needs to be examined. There are, however, certain guidelines

The Federal Government has published booklet titled “Independent Contractors: The Essential Handbook” (available as a free download from the Australian Government website)

This booklet is a comprehensive resource for both contractors and employers. In its own words: “This plain-English handbook goes a long way towards giving businesses and the independent contractors they engage a simple guide to the rules and regulations and the rights and obligations on both sides.”

Also on this web page is a link to a contractor decision tool to help you assess whether contractors are correctly classified.

There are a number of “tests” as to whether a contractor is a true contractor or an employee. One of the more significant tests relates to the question of who bears the risk. A contractor operates a business that produces a result for an agreed price and bears the risk. They are free to delegate the work to their employees (or other contractors) and are obligated to produce goods or services to a specification and a timeframe. If they fail to deliver they don’t get paid, whereas employees do not carry full risk and will (with some exceptions) in the short term continue to receive wages.

On the “Executive Stress Office Support” web site there is an excellent blog which sets out the current criteria for the classification of contractors. This is an extract

“Currently, the rules are that independent contractors (ICs) need to meet certain criteria before they can be deemed to be independent contractors. These include things like the services should be available to the public at large, not just the person/company to whom the services are currently being provided; the IC should be able to hire others to perform the work (sub-contractors); the IC should be able to work on more than one contract at a time; the client has little input into how the IC actually performs the services; and of course, the 80% rule: the IC should not receive more than 80% of their income from the one client.”

Read the full article by clicking here

This area of conflict between employment and contracting is important for many businesses and is subject to change and re-interpretation from time to time by both government and the Tax Office. Small business owners should check compliance from time to time to ensure that their practices are still correct.

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New Unfair Dismissal Rules

The Team - Tuesday, March 09, 2010

It's a common misconception that dismissing employees is somehow illegal. This has never really been the case. It has always been possible for employers to sack employees - it's necessary for the process to be fair and reasonable and not harsh. No matter what the law says from time to time (and successive governments will continue to change the rules) employers should follow some simple processes:

    • Make sure you employ the right people in the first place!
    • Make it clear there is a probationary period for new employees
    • If an employee is not performing, talk to them about your concerns and set out clear steps they must take to improve (including a time frame) - document this discussion and ensure the employee has a copy of these notes
    • If things don't improve, issue the employee with a letter of warning referring to the previous discussion, noting that improvements have not been made and making it clear that if things don't improve that the employee may be dismissed. It is essential that you make it perfectly clear that dismissal is a real possibility.
    • Ask the employee to acknowledge the letter in writing (they can initial a copy) and invite them to respond in writing if they so wish.
    • In the absence of an improvement, then one more "warning letter" may be appropriate making the dismissal and the timing clear, and then proceed to dismissal.

 Employers often ask about time frames and there are no hard and fast rules for this - it really depends on the nature of the job. If the employee is flipping burgers then one could reasonable expect an improvement in performance within the hour! However, if the employee is a divisional manager it may take much longer for improvements to manifest. You have to judge what is fair and reasonable in the circumstances.

 On 1 January 2010 the new law came into effect and there are some new rules applying to small business (broadly defined as a company employing less than 15 employees). These rules are known as the Small Business Dismissal Code. Under this code there is:

  • a minimum employment period of 12 months instead of 6 months (employees can’t make an unfair dismissal claim in this 12-month period)
  • a simple Fair Dismissal Code to help employers ensure dismissals are not unfair
  • a specialist service for small and medium sized businesses from the Fair Work Ombudsman.

There is a lot of useful information on the Federal Government's Fair Work Australia website (www.fairwork.gov.au) There’s also a helpful checklist that small business employers can follow to ensure the dismissal is not unfair and you can download this from the Fair Work site.

If any small business owners want help with employment, remuneration or dismissal procedures drop an email to team@nowbusinessmastery.com and we'll show you how.

 

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