Employee or Contractor - The Importance of Getting It Right

A recent case – ACE Insurance Limited v Trifunovski (No 2) <2012> FCA 793 – illustrates the disastrous costs of getting it wrong.

A number of insurance agents were paid as contractors for a number of years.  The courts held that an employment relationship existed and ordered that those “employees were paid their entitlements”, including annual leave and long service leave.

The amounts the employer was ordered to pay were substantial.  The following relates to just one of the “employees”.

The “employee” was found to have an astonishing final salary of $11,172.26 per week based on his last period of employment, even though the “employee” himself stated that his salary was only $2,127.06 per week.  The annual leave due to him was found to be 29.15 weeks at a cost of $325,671.38.  The same “employee” was due long service leave of $7,459.87.

In addition to this, interest and penalties were payable by the employer. Also, it is probable that the salary paid to the “employees” throughout the many years of employment was higher than it would have been had they been contracted as an employee, as is often the case, and the penalties were now payable on the higher amounts.

For example, it is often the case that a contractor negotiates a higher rate because he pays for his own insurance, phone, car etc, and does not get paid for sick leave or annual leave.  An example of the cost to the employer if his contractor is found to be an employee is as follows:

	Contractor	Employee
Salary package	$120,000	$100,000
Superannuation	included	included
Fringe benefit – car/other	included	$10,000
Total	$120,000	$110,000

Additional amounts payable annually if the contractor is found to be an employee:

Holiday pay – 4 weeks	$ 9,200	included
Superannuation	$ 10,800	included
Total Additional per year	$ 20,000	nil

If the contractor was found to be an employee, after just 5 years of service there would be an additional $100,000 payable to him.

You need to get it right!

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.