It is always a distressing time for employees, contractors and creditors when a company goes into Voluntary Administration or some form of insolvency. This tension is exacerbated when, for instance, an Administrator elects to continue trading the business of the company and has to determine whether an individual is an employee or contractor.
If an Administrator gets this distinction wrong:
- Potential employees may miss out on recovering their employee entitlements from the Federal Employment Guarantee (FEG) scheme; and
- The Administrator may face personal claims against them for unpaid PAYG or other penalties.
Therefore, in determining whether an individual is an employee or a contractor, the following checklist should be considered:
| Feature – the service provider: | Employee | Contractor | Notes |
|---|---|---|---|
| Provides services to multiple businesses | Yes | ||
| Has the right to delegate and employ other persons to perform services | Yes | ||
| Is provided with tools and equipment to perform services | Yes | A contractor generally provides their own | |
| Controlled by the employer | Yes | An employee is usually controlled as to how, when and where they perform their duties | |
| Responsible for risk and rectification of faults | Yes | Employee bears little or no responsibility to rectify poor work. | |
| Has hours of work set by the employer | Yes | ||
| Is paid for their time (eg hourly, weekly, annual salary) | Yes | A contractor is paid for providing services or completing units, and usually issues tax invoices | |
| Not entitled to annual leave, and a written contract would not provide for this | Yes | ||
| Engaged on a personal basis | Yes | If an individual is engaged through a trust, partnership or company, it usually indicates a contractor relationship | |
| Carries on their own business, independently of the employer and as distinct from the employer’s business | Yes | Employee is working in the business of the employer | |
| Their employer is required to make superannuation contributions on their behalf | Yes | Superannuation Guarantee (Administration) Act 1992 (Cth) | |
| PAYG is not withheld from payments | Yes | Yes | There is nothing in the PAYG legislation that deems genuine contractors to be employees |
Example of where this distinction is blurred
- Max is appointed sole Administrator of ABC Pty Ltd (Administrators Appointed) (ABC);
- ABC was engaged in the provision of marketing services to professional clients;
- Without undertaking a competitive tender, ABC (prior to the Administration) engaged XYZ Pty Ltd (XYZ) to undertake the bookkeeping for ABC (ie record invoices and report to ABC management);
- Mary is the sole shareholder, sole-director and the only person engaged by XYZ to perform these services;
- Mary spent her working week at the office of ABC, invoiced ABC on a fortnightly basis and performed no other services to any other company; and
- Upon Max’s appointment, Max elected to continue to operate the business of ABC.
Max wants to know – in respect of payments made to Mary – if Max should be withholding PAYG payments or paying Mary’s invoice and collecting the GST return? In this example, it is highly likely that Mary would be deemed an employee of ABC, therefore, it would be prudent for Max to withhold PAYG, where applicable.
What would happen if ABC had competitively tendered for XYZ’s service or Mary was one of 4 employees engaged by XYZ to perform the bookkeeping services? In such circumstances, we think it is highly likely that XYZ would be deemed a contractor, providing bookkeeping services to ABC.
Takeaway
It is important that employees or prospective employees take active steps upon the appointment of Administrators or Liquidators to sure up their right to FEG monies. This can be done by very early on in the process making yourself known to the Administrator or Liquidator and contacting FEG.
FEG can be contacted by visiting the FEG website at https://www.employment.gov.au/fair-entitlements-guarantee-feg or calling the FEG Hotline on 1300 135 040.
If you have any questions about the above article or you would like some information about how you can protect yourself as an employee, please contact one of our Expert Advisors on 1800 246 801.
Article written by Matthew Hudson, Supervisor, Queensland.