February 12, 2024

ATO’s 80/20 rule and other issues to consider when engaging contractors

80 20 Rule Contractors

It is common for mining and resources businesses to engage workers as contractors. While on the surface it appears straightforward, the ATO’s 80/20 rule and a raft of other issues can muddy the waters as to whether a worker is indeed a contractor or if they’re actually an employee.

If they are the latter, but engaged as the former, you as the business owner may find yourself responsible for unpaid tax, superannuation, lost wages and other entitlements earned over the course of their tenure. In this article we examine the differences, and what needs to be considered when engaging workers as contractors.

As is often the case with employment law, it’s complicated.

Each case turns on its own facts and the legal position as to whether a worker is a contractor or an employee may not actually be known until a Court, Tribunal or the Australian Taxation Office reports their finding.

With regard to the aforementioned 80/20 rule, simply put if 80% or more of a worker’s personal service income is generated from a single client then for taxation purposes, that worker is at least in the ATO’s eyes an employee. Even if they consider themselves a contractor, they (and therefore you as the deemed employer)  are required to pay tax as if they were an employee.

On occasions when contractors have been wrongly designated and legally found to be employees, and they haven’t paid their tax or super, as their employer rather than their client, in addition to having paid their invoices, you will most likely be liable for much more.

This could include your having to pay substantial unpaid tax, superannuation, reimbursement of lost wages and to add insult to injury, any Fair Work or ATO penalties that may apply.

Of equal concern, you could also be liable for damages if the contractor-deemed-employee injures themselves at work.

Whether or not an employer-employee relationship exists is a question of fact to be derived from the circumstances of each case.  However, matters including the degree to which the worker is integrated into and treated as part of the employer’s enterprise, may also have relevance in any legal action.

The totality of the relationship as prescribed by the written agreement between the parties must also be considered. This relates to the ultimate authority and control over the worker, rather than the actual work exercise.

There are both advantages and disadvantages relating to employee and contractor scenarios, and these should be worked through with your Employment and Industrial Relations legal advisor in context of the business and worker’s circumstances.

On some occasions, it is to everyone’s advantage for the worker to be engaged under a contract, rather than as an employee.

For example a specialist surveyor or geologist may wish to remain an independent contractor so they can work for other businesses in the mining and resources industries.

Alternatively, the worker may have accountancy advice that indicates that working under a contract is lawfully to their advantage.

An agreement between the parties is also of paramount importance. Importantly, the agreement needs to be in writing.

Failing to have a written agreement that clearly outlines the obligations and responsibilities of each party can have far reaching consequences for both a business owner defending their case and a contractor to be paid their entitlement.

Matters including dealing with out-of-scope expenses, schedule of payment for services rendered, confidentiality and any post agreement actions should all be outlined in a contractor’s agreement.

Risk allocation and insurances must be clearly articulated in any agreement with both parties expected to have appropriate insurances with adequate cover amounts.

Business owners should note, most business public liability insurance policies do not cover claims caused by contractors.

If a contractor caused a claim, and they are without insurance cover, the affected party will look for someone to sue and you as the business owner could find yourself liable for millions of dollars in damages.

Next steps

Employment law is complex and it seems it’s constantly changing. May I recommend business owners regularly review and update your employment policies and procedures, especially for engaging contractors.  As explained here, it’s imperative to correctly and legally designate workers, as a contractor or if they are in fact an employee.

For advice about industrial relations and employment law or to arrange a time to meet with Robert Lamb please call 61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au

To learn more about Robert, visit this link.

Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting and business advisory services for executives, professionals and business owners in the mining and resources sectors.

The information in this article is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate, we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.

 

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