Compliantly Engage Contactors in Australia

Any business hiring in Australia should understand the important legal distinction between when a worker should be classified as an employee, and when a worker can be engaged as an independent contractor. Businesses can face serious fines and penalties for misclassifying employees as independent contractors or freelancers, a practice known as "sham contracting." 

In Australia, merely describing an individual as an independent contractor has no legal significance. Instead, various factors are taken into account to determine the true legal status of the individual. Foreign employers hiring for the first time in Australia may also face a mountainous climb against paperwork, as the Australian government enforces strict adherence to filing payroll and tax reporting requirements.

A global employment partner like Worksuite can ensure a compliant hiring framework that accurately classifies independent contractors, and lets you know when talent must be engaged as a contractor, or employed directly. Employers in Australia are also fully responsible for submitting employment, immigration, tax, and payroll regulations. This process can be outsourced to the Worksuite platform, making it flexible and fast to acquire talent and ensure full compliance with Australia’s labor and tax laws.

The safest way for foreign employers to begin their hiring footprint in Australia is through global workforce management providers like Worksuite, which specializes in local contractor compliance classification and screening. This makes it flexible and fast to onboard new talent, without needing to set up a subsidiary company or face the heightened risks of hiring freelancers and independent contractors in Australia.

Sham contracting laws are well enforced in Australia, which makes it unlawful to characterize employment relationships as independent contractor relationships. 

Despite the risk, many foreign employers may still prefer to independently source contractors primarily for its cost-effectiveness.

Worksuite can help you source and work legally with an independent contractor under full Australian hiring compliance by providing:

• Documentation & agreement structure
• Payment structure
• Tax arrangements
• Guidelines for degrees of autonomy
• Pre-made templates of contracts

Classifying Employees vs. Independent Contractors

In Australia, a fully-fledged employment contract is called a ‘contract of service’ while the agreement with an independent contractor is known as a ‘contract for services’.

Foreign employers must ensure that contractors operate under a contractor at law, rather than an employee. An employer will not necessarily be alleviated from the responsibility of paying legally entitled employee benefits simply because a person regards themselves as a contractor.

The hiring of contractors is governed by two pieces of legislation: the Fair Work Act 2009 and the Independent Contractors Act 2006. In general, key characteristics that denote Australian independent contractors in include:

• High level of control over the work they perform (hours, location of their work, and how they perform)
• Bear the risk for making a profit or loss on each task 
• Use their own equipment and/or tools for the work
• Decide what hours to work to complete the contracted service
• Engaged for a specific task
• Pay their own tax
• Pay their own superannuation, in most cases
• Do not receive paid leave
• Do not receive regular payments representing a wage or salary

Courts look at the whole relationship between the parties when determining if a person is an employee or an independent contractor. One of the key indicators characterizing a relationship is the level and degree of control one party exercises over the other. The method of payment is also seen as a key characterization. For example, employees are paid on a regular basis, while contractors generally receive payment on submission of an invoice after delivering a service.

Sham contracting

In some cases, a worker may be told by an employer that they are an independent contractor, when they are actually classified as an employee by the Australian government. If the employer knows this, or was reckless about the employee’s status, then there may be what’s known as a sham contracting arrangement. Sham contracting in Australia is illegal. This type of arrangement is sometimes organized by an employer in order to avoid paying benefits to employees. Specifically, it is illegal to:

• Tell an employee they are an independent contractor
• Say something false to an employee in order to convince them to do the same work for the employer but as an independent contractor;
• threaten to dismiss or dismiss an employee if they do not become an independent contractor; or dismiss an employee then hire them as an independent contractor to do the same work.

There are two primary engagement models for working with independent contractors in Australia. Note that this does not include Construction-based contracts, which have a different legal basis in the country.

A. Direct engagement of the worker as self-employed or registered via their own limited company. To facilitate direct engagements there are two general types of contracts to use with independent contractors:

• Self-employment (Sole Trader)
  Under this model, the hiring company engages directly with the independent contractor and establishes a direct contract for the provision of services. The hiring company then pays the independent contractor directly, in accordance with the terms of the contract.
• B2B Self-employment (Limited Company)
  Also referred to as a B2B contract, this model engages the contractor company-to-company. This model can be advantageous for the hiring company and contractor, as sham contracting laws are often less applicable to B2B contractual relationships.
• Period Contracts
  Period contracts are often used for intermittent projects, allowing greater flexibility to do work under specific time frames.

B. Umbrella company. These firms come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

• Staffing agency. Similar to B2B employment, foreign employers may work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and pay contractors. Here, the hiring company engages with a staffing agency, which in turn supplies one of its own contractors to deliver the contracted services. The hiring company pays the staffing agency directly, in accordance with the terms of the contract.
• Hiring partner: Similar to B2B employment, foreign employers may work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and pay contractors. Here, the hiring company engages with a staffing agency, which in turn supplies one of its own contractors to deliver the contracted services. The hiring company pays the staffing agency directly, in accordance with the terms of the contract.

Companies hiring independent contractors in Australia should avoid making payments directly through their payroll system. Beyond these guidelines, there is a wide range of lawful methods to deliver payment to contractors in Australia. The contract should stipulate the preferred payment method agreed upon by both parties. The typical window for paying a contractor is 14 days or 28 days from the date of issuance of the invoice.

By working with a hiring partner, companies can streamline contractor payment processes significantly. A dependable partner can help you hire your contractors legally and pay them quickly, accurately, in the local currency, and in a way that complies with Australian regulations.

Independent contractors are liable for several different taxes in Australia, principally income tax and, if applicable, goods and services tax. Income tax is calculated by establishing a contractor’s taxable income, then applying the tax rates set out by the Australian Taxation Office (the ATO provides its own tax calculator).

Contractors can face the challenge of calculating income when they don’t know how much they will be earning. To tackle this problem, they can use previous earning periods to make estimates, overestimate to avoid unwanted tax bills, or pay tax in quarterly installments. Payments are made through the country’s Pay As You Go (PAYG) income tax collection platform. 

In addition to income tax, contractors, in general, will have to pay goods and services tax if they earn more than AUD$75,000 a year, by charging a 10% tax on most goods and services. If a contractor is required to pay GST, then they must complete and file a business activity statement (BAS) quarterly with the ATO. The BAS must show quarterly income, how much GST is owed, the contractor’s PAYG installments, as well as any fringe benefits tax.

We can simplify hiring full-time workers in Australia by acting as the Employer of Record (EOR) on your behalf, handling everything from contracts, onboarding, documentation, payroll, benefits, and workforce management. Reduce your time-to-hire by 90%, slash your overheads, and remain fully compliant.

• Quickly find, hire, and onboard talent in Australia without setting up your entity
• Prevent expensive legal, contractual, or tax mistakes in Australia
• Manage contracts, payroll, and global tax forms all in one Worksuite