Whether you are a startup looking to hire a contractor or you yourself are providing a service and issuing an invoice it is important that you know your stuff to avoid finding yourself in hot water.
Startup Obligations as an employer
Hiring a contractor as a helping hand can be a very tempting proposition for a bootstrapped startup. With a burning platform founders are often reluctant to commit to the hassle of employees with payroll, ATO and Superannuation liabilities overheads.
Business owners beware if you don’t understand the difference between a contractor and an employee you run the risk of paying a contractor top daily rates when in fact they should have been treated as employees. You may land up being audited and if legislation has been ignored this can result in coughing up superannuation payments as well as penalties for evading employment legislation. This has potential for huge financial burden on any business owner, if not ruin for an early stage business. Remember it’s not just superannuation and penalty costs that you may incur, it’s also the cost of lost opportunity for your startup while you sort out the mess you found yourself in.
Here are some simple things to ask yourself before you dive in and give someone the go ahead to work for you.
An independent contractor usually:
decide how to do their work and what skills they need to do it
decide whether to employ someone else to do the work
carry the risk of making a profit or loss
pay their own superannuation and tax, including GST
have their own insurance
are contracted to work for a set time or do a set task
decide what hours to work
invoice for their work or get paid at the end of the contract or project
don’t get paid leave.
do ongoing work that is controlled by their employer
work hours they’re told to work by their employer
are not responsible for financial risk
are entitled to superannuation from their employer
are entitled to minimum wages
have income tax taken out of their pay
are paid regularly (weekly / fortnightly / monthly)
are generally entitled to paid leave if they are permanent employees.
Employing people can be a bit of a minefield. Business owners need to make themselves aware of their obligations in relation to hiring contractors and startups are no different. Here are a few helpful places to learn more:
Australian Government – Business Topics – Employing People.
Fairwork Ombudsman – Employer-obligations
Australian Taxation Office – Employers – what you need to know
Do Startups need to sign an agreement with a contractor?
If you engage a contractor to work on your startup without having a suitable agreement in place, chances are everything will be fine, but unfortunately things can and do go pear shaped. For example the last thing you want is to discover when you’re in the final stages of negotiating the close of a Series A capital raise, that a contractor owns the intellectual property (IP) rights for the work they performed back at in the early development of your business.
A simple IP (Independent Contractors) agreement is recommended every time you engage a contractor. It’s really no different to employing an employee without an employment contract.
If the contractor is a Pty Ltd entity you can rest assured that you are safely engaging a contractor in the true terms. For individuals who simply hold an ABN (Australian Business Number) it is worth doing a quick check on the ABN Lookup website. Important things to check, is the ABN active and is the contractor registered for GST.
Note: A contractor who is not registered for GST should not charge you GST.
If the contractor does not provide an ABN you are required to withhold 46.5% of any payments and report these to the ATO (Australian Taxation Office).
Also beware that other than a Pty Ltd entity you should not contract a sole trader or partnership for more than 90 days in any financial year. If you exceed this period that person may be deemed as an employee. For the lucky startups out there that already have employees and have hit the payroll tax thresholds you may find that you need to include contractor payments in your calculations too. To read more on this subject head to the Office of State Revenue website.
Are you really a Contractor?
Some of you out there may refer to yourselves as Freelancers rather than contractors. It is quite possible that you are unaware of the potential risks that you may face by engaging with businesses and providing your services in this way.
As a contractor you don’t have to an ABN, however the businesses that you work for are legally required to withhold 46.5% of payment and report them to the ATO if your invoice does not include an ABN.
To find out more and to apply for an ABN go to the ATO Website.
Do IT Contractors need insurance?
There is legal uncertainty concerning the activities provided by IT Consultants. In providing software advice or design, are they providing a ‘service or a product’ and therefore, should the claim be treated as a ‘service’ which is covered under a P/I policy or should the claim be treated as a ‘product’ and covered under a Public / Products Liability policy. To avoid this uncertainty, insurers recommend that IT Consultants have 1 policy with 1 Insurer covering both sections.
In many cases an IT Contractor will not be considered for a contract unless they have a minimum level of Professional Indemnity and Public Liability insurance indemnity insurance.
Professional Indemnity is primarily designed to respond to financial loss arising from faulty advice, design or specification by the service provider. The design engineer or IT consultant upon whose advice or design the Principal or the Principal’s customers rely upon, is the Professional targeted by PI Insurance.
For Startups and Contractors who want to know more.
The government have put together this great Independent Contractors The Essential Handbook for employers of contractors and those who work as contractors to gain clear concise information about your responsibilities and rights.