Are your staff employees or independent contractors?

Ferrac International had an agreement with a company for the delivery of the company’s bakery products. During the relevant period, Ferrac International engaged a number of “drivers” to make the deliveries.

The Tax Commissioner audited Ferrac International about its obligations under PAYG withholding, super guarantee and fringe benefit tax and determined that all of the drivers Ferrac International paid throughout the relevant period were common law “employees” of the taxpayer and not “independent contractors” as Ferrac International argued. The Commissioner’s conclusion was based on a number of points, including that:

• the contractors were paid solely for their labour;
• they did not own or lease their own vehicle; and
• they did not have any control and they did not delegate any of the work.

The AAT said the supermarkets for which Ferrac International held the delivery contracts associated Ferrac International’s workers as being its employees. The workers identified themselves as being part of Ferrac International’s business and they wore a vest containing Ferrac International’s business name. The packers signed in and out of the supermarkets identifying themselves as being part of Ferrac International’s business. The Tribunal said they did not carry on their own businesses and Ferrac International held the risk. For example, if a truck broke down, the company would wear the cost of repairs.

An assessment of tax liability totalling almost $150,000 plus penalty was issued and the Ferrac International’s objection was disallowed.

The AAT found the relevant drivers were “employees” of Ferrac International throughout the quarters ended September 30, 2009 to June 30, 2011 and that Ferrac International had failed to withhold an amount from the payments it made to them in those quarters.

The Tribunal said it followed that Ferrac International was liable to pay the Commissioner a penalty equal to the amount that it failed to withhold. The Tribunal considered Ferrac International had not discharged its burden of proof, on the balance of probabilities, that the assessment was excessive. It also found there was nothing in the particular circumstances of the case to warrant a remission of the administrative penalty imposed.

The case is yet another reminder for SMEs to be very careful when classifying people that work for them as employees or contractors. This is an area the Tax Office takes a keen interest in.

Ferrac International case shows differences between employees and independent contractors

Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.