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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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Back In Black - Are Small Business Owners Celebrating After This Week's Budget?

The Team - Thursday, May 13, 2010
The Main Budget Issue

The main deliverable from this budget is a return to surplus in 3 years instead of the forecast 6 years.

However, this budgeted result is dependent on the strength of our trading partners - something over which the Government has no control - and the belief that the new resources rent tax will deliver a whopping increase in revenue within 3 years, without reducing economic activity by causing the miners to head elsewhere.

Responsible Economic Management or Luck?

As no one was expecting much in the way of handouts from Tuesday's budget, apart from all the usual interest groups who feel compelled to put out a press release following the annual budget, no-one was particularly surprised or disappointed.

The main message the Government wants to spread is its claim to responsible economic management. And it is now removing the stimulatory measures which pump-primed the economy during the GFC (and which may have protected Australia from the kind of economic basket case much of Europe has become) and reducing the budget deficit so that Australia is forecast to be back in the black within 3 years

Forget about smokes, $8 extra take home pay and all the marginal issues, the main game is the elimination of the current budget deficit of $57bn within 3 years instead of the 6 years previously forecast.

Although the economic cards may have fallen in Australia's favour, whether this is due to the stimulus package or largely because we are a resource based economy with a strong banking sector, many commentators believe that the Government's inability to transact basic business (insulation, school building program) without reeking havoc will not be easily forgotten of forgiven.

So what's in it for small business?

Directly, not very much:

- Company tax for small businesses will reduce from 30% to 28% from the 2012/13 tax year
- Also in that year, there will be some accelerated depreciation benefits, the main one being the ability to write-off assets under $5000 in one hit. This is not a cash benefit as such, but has a cash flow timing advantage.

Employment Costs Will Increase

Commencing on 1 July 2013, superannuation contributions are to gradually increase from the current level of 9% to 12%. Meanwhile wages are expected to grow by 3.75% in the 2010/11 year and 4% in the following year. The theory is that employees wear the cost of the increased super contributions in lower wage increases. In the real world, where small business is competing for quality employees, the cost of employment will go up.

In addition, unemployment rates are forecast to be around 5% in the coming 3 years which means a tight labour market for most small businesses

Of course, the health of the small business sector is largely in the hands of big business and small business owners rely on big business continuing to grow, invest, employ and spend.

Finding and retaining qualified staff remains a major problem for many small businesses. The proposed investment in training and apprenticeships is welcome but any benefits are likely to take several years to percolate down to you as a small business owner.

Still Waiting For the Government to Provide Real Small Business Assistance

Overall not much direct help for you in this budget.  As a small business owner we're sure you that you have never expected much from any government. Your business fortunes rise and fall based on your strategic insight and your ability to provide quality goods and services at the right price to a willing market. And you have to be expert at all aspects of running a small business in order to succeed!

There are some niche businesses which stand to benefit. These include training, primary health care, renewable energy and education and if you can see some tactical advantage in aligning your business with the potential winners from this budget then there may be some long term gains to be made.

The best any of us can hope for is that successive Governments will get out of the way and allow us to continue to do what we do best with a minimum of red tape and interference.

We would welcome your comments below on how the current economic climate and the budget initiatives may affect your business.
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