A recent case has highlighted the dangers of engaging individual contractors who later turn out to be employees.
Background
A family trust (the trust) carried on a commercial residential plumbing business and during the relevant periods employed 13 plumbers and 4 to 5 independent contractors.
During the relevant periods in question, the trust was audited by the ATO to ascertain whether they had met their superannuation guarantee obligations, specifically focusing on the independent contractors.
Following their enquiries, the ATO determined that these contract plumbers should be treated as employees and consequently issued assessments for superannuation guarantee shortfalls for the quarters from 1 July 2009 to 30 June 2011.
The Administrative Appeals Tribunal (AAT) found in favour of the ATO.
REASONS FOR COURT DECISION:
Contractual documentation
There was an agreement in place for each contractor. However, each contract was the same and therefore it was concluded the type of arrangement was more like what would be expected for an employee.
The important point to note is that had each contract been negotiated separately, they would have likely had different terms and conditions. If this was the case, the outcome could have been different.
Motor vehicle and tools provided by contactors
The contractors did use their own vehicles and tools, but where they were required to do specialised work, they used the trust’s vehicles and tools. Furthermore, the trust’s credit cards were given to the contractors to buy plumbing supplies as and when required.
Limited control over the contractors work
Although the trust had limited control over the contractors work, the court said that this was “not surprising given that each of the contractors was qualified and experienced”.
Right to refuse work
Though the contractors did have a right to refuse jobs, they did not in reality and they did not have to rectify any defects at their cost.
Contractors were paid an hourly rate
The unfortunate issue was that the contractor’s hourly rate was set by the trust. Also the hours were generally regular working week hours.
Contractors had ABN’s and were not required to wear clothing with a company logo
Each of the contractors did have ABN’s, but they never quoted on any jobs. They simply undertook the task based on the hourly rate set by the trust. They also did little or no work for any other plumbing businesses and almost worked exclusively for the trust.
The contractors also did not issue any invoices on their own letterhead. Even though they were not required to wear clothing with the company logo, they did indeed wear them.
Conclusion
Clearly based on these facts, the trust believed they were doing the right thing by treating these people as subcontractors rather than employees. However, when the ATO and the court examined the underlying evidence, it was obvious that these contractors should be treated as employees.
Caution should be taken to ensure that where contractors are used, the above facts are carefully considered to ensure that if the ATO undertakes an audit or review, you are safeguarded against any undue tax liabilities.
