We saved our client potentially $150,000 with a review of contractor arrangements – before an ATO Audit!

Winging it when it comes to engaging contractors is common but can lead to harsh consequences if you get it wrong.  HR Business Direction worked with a client who was very grateful they had been proactive in seeking assistance regarding their contracting arrangements when the ATO came calling…

After having attended a seminar presented by HR Business Direction, our client contacted us seeking assistance with its existing and ongoing engagement of contractors.  Having attended the seminar, our client became aware of the many pitfalls and potential liabilities of engaging staff as contractors rather than employees.

One of the problems faced by our client was that, although they had a reasonable form of contractor agreement in place, many of their systems and processes did not reflect a true contracting relationship between the worker and the client.  Having attended our seminar, our client recognised that, should the business’ arrangements with contractors be viewed by the law as an employment relationship, the business was exposed to a potential liability for unpaid entitlements such as annual leave, loadings, penalty rates, allowances, overtime and long service leave.  It also raised questions as to whether the business should have been withholding PAYG tax, paying superannuation and effecting workers’ compensation insurance for those contractors (bearing in mind that sometimes Superannuation and WorkCover legislation deems contractors to be workers with superannuation and WorkCover entitlements).  Then there were the potential penalties for failing to do what is required of employers.  This issue was keeping our client awake at night.

HR Business Direction was engaged to review the existing contracting arrangements and to prepare a new contracting agreement which gave the business greater protections and provided better evidence of how the relationship worked.  As part of the review process, HR Business Direction reviewed the way in which the relationship actually operated (rather than just how it looked on paper).  We found that the client had several practices which, although they were not documented in the contractor agreement, essentially treated contractors as if they were employees.  This included the payment of performance bonuses and displaying contractors as “Employee of the week” in its reception area.

Following our review, our client changed these practices and implemented a new contracting agreement which clarified various existing aspects of the relationship between the contractor and our client and introduced various new practices and obligations which made the nature of the relationship much clearer.

Several months later, our client was audited by the ATO in relation to its contracting arrangements.  We are pleased to report that our client’s contracting arrangements were satisfactory to the ATO and, therefore, our client avoided hefty penalties and potential back payment of entitlements.

At HR Business Direction we pride ourselves on providing employment and industrial relations advice and solutions that are relevant to the needs and requirements of our clients and not unnecessarily complex.  Due to the number of contractors engaged by our client, we estimate that by seeking our advice, our client has potentially saved at least $100,000 in penalties to the ATO.  This is in addition to the high potential for a claim for back payment of at least $50,000 in entitlements which can follow a finding by the ATO that the contractors were actually employees.

Our client now sleeps well at night in the knowledge that the business’ contracting arrangements are lawful and not exposing the business to a huge liability.