To employ or subcontract, that is the question. This article covers some, but not all, issues regarding employees vs subcontractors.
After toiling away as an apprentice stonemason and getting a few years under your belt fully qualified, you decide that you want to start your own business. After selecting the most suitable business structure for yourself, you get out there and cut some stone. After a solid 18 months of working by yourself, you decide that it is time to take on someone. Many hands make light work and when you are working with something as heavy as stone, the lighter the better.
There are many ways to go about paying someone for their work, though paying someone with pilchards generally only works for the stars at certain water based attractions. So in this article we will discuss paying someone as either an employee or subcontractor.
Employee: An employee is someone that is hired to work for you; you pay them a salary or a wage for their services. An employee can be a casual, part time or full time, they can be employed for one week or for their entire working lives. An employee has the following rights and entitlements, that you as the employer are liable for.
Superannuation: This is currently paid as 9.5% of the employees ordinary earnings; it is paid to a complying superannuation fund that the employee can only access upon retirement or in certain circumstances.
Work Safe/Work Cover: This is insurance that covers your employees if they injure themselves at work, your public liability insurance does not cover this. The Workcover premium in the stonemasonry industry would be approximately between 1.829% and 3.008% of the rateable remuneration, which is the total of wages and salary, plus super, plus other payments such as Fringe Benefits Tax (FBT). Stonemasonry seems to be an industry where claims are more likely to be made, as the ice cream manufacturing industry has n rate of 1.091%
Pay As You Go Withholding (PAYGW): This is tax paid on behalf of the employee; let’s say that the employee is paid $1,000 a week gross wage. The tax payable on that amount is $183. That means the employee receives $817 in their pay packet and you would pay $183 per week to the Australian Taxation Office (ATO). You as the employer are responsible for paying the PAYGW to the ATO.
Entitlements: full time and part time employees are entitled to accumulate annual leave and carers/sick leave. This is four weeks and two weeks respectively for a full timer, and apportioned out for a part timer. All employees accumulate long service leave, which is calculated on one week of leave for every 60 weeks worked. Though this is only payable after seven years of service if they leave, and eligible to take after 10 years of continuous service.
Subcontractor: A subcontractor is someone that is hired to complete a job. They may work for many different people, get to negotiate their payment and working terms, and are responsible for fixing their own mistakes. They have their own Australian Business Number (ABN) and business structure, and it is that entity that is paid. A true subcontractor is not paid superannuation, or included in the wages calculated for the Work Cover premium, nor are they eligible for entitlements. They are paid a gross amount for the job and that is it, you do not have to withhold any PAYGW from their pay.
If you hired a subcontractor to repair a broken window due to enthusiastic apprentice sweeping activities, they are a subcontractor and not an employee, that is a fairly clear distinction. Though you may think to hire a bloke with an ABN as a sole trader to do some labouring for you, clean up the workshop, get coffees and general work. You are not sure if he will work out, so to avoid setting up superannuation payments and having to put him on the books with the ATO you hire him as a subcontractor. This may be attractive as you do not have to wear any additional costs so you say that they are not an employee and you have a contract with them for the job. Though if you are paying them regularly, they only work for you, you fix their mistakes for them, and they can not subcontract their work to someone else, you can call it what you like, but the ATO may view this person as an employee. The ATO can say that they have the right to all entitlements that an employee is eligible for. This could be a costly exercise if years down the track you have to retrospectively pay leave entitlements, along with Work Cover, super, PAYGW, and any other obligations that may arise.
This is general information and is not specific to your circumstances. We recommend that you speak with a professional if you have any queries on the topic.