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The issue that never goes away – employees or contractors?

The perennial issue of whether a person is or should be engaged as a contractor or employee continues to baffle business owners, HR managers and contractors alike.  The question is often asked as to why the law should intervene when two sufficiently savvy parties wish to enter into an independent contracting arrangement.

Whilst there are valid arguments on either side of this question, the fact remains that many businesses are aware of and ignore the very real risks of engaging as contractors those who the law would otherwise view as employees.

There are the legal risks such as a Fair Work prosecution for sham contracting, or that the ATO will hunt the employer down for failing to withhold PAYG tax or remit superannuation, or that the relevant state workers compensation authority will impose penalties for failing to effect a policy when required – to name a few.

However, there are risks to the firm’s reputation should a prosecution or penalty result.  The business could be publicly judged and viewed as trying to circumvent workers’ rights.  And then there is the financial risk of loss of business resulting from reputational damage, not to mention the costs of defending actions and paying fines.  This can also affect employee morale because of the perception that contractors get paid more for doing the same job.

For employers, the decision to hire contractors often revolves around the need for flexibility without the fear of an unfair dismissal claim when terminating the arrangement. But for those employers worrying about termination and unfair dismissal, the risk is quite low provided the process is handled properly.

And if hiring a full time employee instead of a contractor cannot be avoided, the minimum employment period (of 12 months for small business employers or six months otherwise) allows the employee’s performance to be assessed and the employer can terminate the employment without fear of an unfair dismissal claim.

Of course, there are reasons other than the need for flexibility as to why businesses are not keen on engaging employees full time. However, where the law sees a contractor as an employee, it’s not worth ignoring the risks.

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