What are the options and what are the pros and cons of each of the arrangements?
With the Independent Contractors Bill likely to be introduced by the end of 2005, APESMA expects an increase in the number of members asking about the relative merits of operating as an independent contractor, through a labour hire agency arrangement or as a casual employee. The information which follows is provided as a starting point for considering some of the issues around non-standard work arrangements and the basis on which you can opt for different arrangements.
As well as reading through the other material provided in this online guide, APESMA advises members to consult an Accountant or taxation professional to look at how choice of working arrangements will impact on the individual’s particular financial and personal circumstances.
To begin with, this table may help those considering contracting to understand the various categories of non-standard employment.
Employment relationshipProducing company is employing company / Producing company is not employing company
Permanent
employee (full or
part-time) / Casual employee / Labour hire/employment agencies / Independent contractors (“sole traders” or “own account workers” either with or without an ABN) / Outsourced suppliers
Workers are employees employed by
the labour hire agency (most often casual) / Workers are contractors – sometimes known as dependent contractors
(ODCO arrangements refer
to independent contractors who work through a labour hire agency)
Source: Based on Categories for understanding non-standard employment, Extract from ACIRRT study, Briggs, C. & Buchanan, J., Costs and liabilities associated with non-standard work: key issues for accountants, 2002, University of Sydney. p.9.
The table firstly divides workers into those who are employed by the producing company and those who are not. For those employed by the producing company, the distinction is drawn between permanent and casual employees. For those not employed by the producing company there is no direct employment relationship, and this group is divided into those who operate through a labour hire agency, those who are independent contractors, and those who are outsourced suppliers. The independent contractors are classified as either sole traders or own account workers and they may or may not have an ABN. Labour hire workers are further divided into those who have an employment relationship with the labour hire agency and those who do not. Those who do not include contractors sometimes known as “dependent contractors”.
According to a 2001 Productivity Commission Report, professionals comprise 10 per cent of the red/shaded section.
Non-standard work: What are the options and what are the pros and cons of each of the arrangements?1
The Association of Professional Engineers, Scientists and Managers, Australia
So, what are the issues members need to look at when weighing up options on whether or not they would consider operating as an independent contractor? There are three main areas to consider in deciding on how to structure your work arrangements – control, financial impact and termination entitlements – and these should be taken into account when considering any of the three major options for structuring your non-standard work arrangements – as an independent contractor, an employee of a labour hire agency or as a casual.
Independent contractor arrangements
A contractor is, by definition, not an employee. This means that the contract is not covered by employment laws so minimum standards and conditions such as annual leave, parental leave and unfair dismissal provisions do not apply. Contractor relationships are governed by the law of contract. An independent contractor performs work for someone else, often as part of a larger task or project. Some are employed on an ongoing or long-term basis. Independent contractors are most often (though not always) self-employed individuals with an ABN who organise to pay their own taxes and superannuation, and provide their own professional indemnity, public liability and salary continuance (in lieu of workers’ compensation) insurance. They must also provide for their own holidays, sick leave and long-service leave, and cover business expenses such as travel and equipment costs. The diversity of your client base should also be considered when thinking of setting up as a contractor – the Alienation of Personal Services Tax legislation can create problems – if you are earning more than 75 per cent of your income from a single client, the ATO may deem you to not be a personal services business meaning a range of business deductions are not available to you. The major advantage of operating as an independent contractor is the freedom and control associated with being your own boss – if you operate as a contractor your scope of control is much broader than as an employee. Financial rewards and tax implications can also be a bonus though income insecurity is also reported to be the major disadvantage of working under these arrangements. APESMA offers contractors information on contractor hourly rates which provide for entitlements accrued by employees such as sick leave, annual leave, etc. and which also take into account the costs of PI insurance, salary continuance and a range of other costs associated with operating as a contractor. This information is available from the Business Info page of the Connect website at
Labour hire arrangements
Generally speaking, working in a labour hire arrangement differs from independent contracting in that the labour hire firm or agency pays superannuation, a regular salary, covers insurances and deducts PAYG tax for the professional, whereas an independent contractor must organise these themselves. Under a labour hire arrangement, a professional most often has a contract of employment with a labour hire firm or agency, but performs work for another firm, the principal employer. The principal employer’s premises and equipment are usually involved, under supervision of the principal’s employees. The principal employer then has a separate contract with the agency or labour hire firm for the provision of “labour”. In other words, the employer is the labour hire firm or agency, although the professional appears otherwise to be employed by the principal firm. The majority of those working through a labour hire firm are casual employees.
Independent contractors can also work through a labour hire agency without having a formal employment relationship with either the labour hire firm or the principal but these arrangements are less common in the case of skilled professionals. Such arrangements are sometimes referred to as ODCO arrangements.
There are both advantages and disadvantages of working in a labour hire arrangement. Particularly for short term contracts, the labour hire firm takes responsibility for many of the more expensive and inconvenient aspects of contractor-style employment, such as recovering unpaid debts from principal employers. Additionally, it can be a good way to get a “foot in the door” with the principal employer for future direct, permanent employment, or to add to your professional experience. Operating via a labour hire agency also means that generally your personal assets are not at risk which is an issue if you are living on retirement earnings and have assets to protect. You can be paid as an individual or through a company structure if working through a labour hire agency – the advantage for a company being that the relevant insurances can be arranged through the agency. Working through a labour hire arrangement can also mean you spend less time on bookkeeping and recordkeeping – the agency’s records can be provided direct to an Accountant.
On the negative side, it is often quite easy for the principal employer to “dismiss” labour hire employees with or without a good reason. As there is no direct employment relationship with the principal employer, the relevant legislation and employment protections often do not apply. And of course you pay a premium for this convenience of operating via a labour hire agency in the form of the fee you are charged – this premium can be anything from 3 to 10 per cent. Some individuals who operate via a labour hire agency also find it frustrating not knowing that hourly rate the principal is paying the agency for the work they’re performing; this information is often kept confidential by the agency. Labour hire firms may also generally reluctant to provide training and professional development for their employees.
Contractors who aren’t contractors
The term contractor is sometimes used to refer to arrangements quite different from traditional independent contracting. For example:
•When hired on a fixed-term contract: usually a full-time, permanent part-time or casual hired for a specific period. Entitled to superannuation and, depending on the exact contract details, sometimes paid holidays and other benefits of standard employment.
•In labour hire arrangements: professionals working for a labour hire firm can be either contractors or employees of the firm. In some workplaces, all labour hire professionals are referred to as contractors. If, however, the labour hire firm pays superannuation, a regular salary, covers insurances and deducts PAYE tax, the professional is most likely an employee of the agency and not a contractor.
•Contractors in name only: an individual can be employed full-time, permanent part-time or as a casual employee, but still called a contractor. The semantics are usually harmless, but an unscrupulous employer can use them to deny employees their rights and entitlements.
Casual employment
Casual work was intended to allow room for employers in certain industries to deploy labour for short-term irregular work demands. Under temporary casual employment, an individual is engaged to work for a short period (perhaps one or two days) and may be re-engaged repeatedly, at intervals. With ongoing casual employment – more common with students and young graduates – engagement is on an hourly or daily basis but it is ongoing, with some expectation of regular work.
Both types of casual receive superannuation*, but not benefits such as paid annual leave, sick leave or public holidays. To make up for this, casuals receive a loading on top of the normal pay rate (generally 15 to 33 per cent). Casual work may offer flexibility but casuals can have their employment terminated at very short notice. Depending on their contract, the relevant award and in some cases the regularity of work hours, this could be as little as one hour. Likewise, casual employees can resign at short notice depending on their contract or award.
If you are offered work as an independent contractor, through a labour hire agency or as a casual employee and are not sure how you should proceed, you should speak in the first instance with an Industrial Officer in your Branch Office, and then seek professional advice from an accountant or tax professional. Only by doing this, can you ensure you make an informed decision about the potential impact of the working arrangements on your working life, your personal circumstances and your financial situation.
* Casuals and superannuation – where a casual employee earns more than $450 gross per month, the employer has an obligation to make a superannuation contribution to a complying fund on their behalf.
Non-standard work: What are the options and what are the pros and cons of each of the arrangements?1