What are your obligations when you hire an employee or contractor?

Making your first hire is an exciting time! Your business has reached the point where you’re ready to start growing your team. This can also be an overwhelming time, because as well as finding and interviewing the right person you also need to make sure you’re meeting your obligations towards your new team member.

To make this experience easier for you I’ve set out below the key decisions you need to make, and obligations you need to be aware of as an Australian based business.

Your first decision point: How much can your business afford?

The first decision you need to make when hiring a new team member is what can your business afford to pay that person.

To answer this question, you need to look at your budget to see how much you can increase your expenses by.  Also, consider if your team member will directly contribute to income, e.g. a sales person, or if they’ll free up your capacity so you can bring in more income, as that could impact on what the business can afford to pay.

Once you have that figure you can then look at the marketplace to see how many hours that equates to for that type of role.

Your second decision point: Will you hire an employee or contractor?

In order to decide this question, the entire working arrangement needs to be considered. Simply calling someone a contractor doesn’t necessarily make them so.

This decision is important as it affects your tax, super and other obligations. There can also be penalties and charges if you get it wrong.

The Australian Taxation Office (ATO) has created an employee/contractor decision tool to assist businesses with these decisions. Click here for the Decision Tool. 

Take your time as you work your way through the questions that the tool asks you, especially this series of questions:

Let’s say you were wanting to hire a contractor to do two hours of bookkeeping a week and code certain transactions. You might read the first option and think that fits as you’ll be paying an hourly rate, yet it’s likely to be the third option for this example as your worker is completing a specific job for a set amount. Read the options carefully before choosing as the first option is more likely to indicate an employee, whereas the third option is more likely to indicate a contractor.

What is the difference between a contractor and employee?

If you’re not yet sure what the difference between a contractor and an employee is then this definition from the ATO will help:

“An employee works in your business and is part of your business. A contractor is running their own business.”

For more information on the differences go to this table  where the ATO has outlined six factors that, when taken together, will help determine if you’re hiring an employee or a contractor, for tax and super purposes.

Your obligations to your team members

Your obligations for tax and super will depend on whether you’ve hired an employee or a contractor.

Contractor

Contractors are required to pay their own tax as part of running their business.

Usually, your business will not need to pay super to a contractor. However, there are certain circumstances where your business is obligated to pay super to a contractor. If you’re unsure about your obligations then talk to your accountant, business advisor or tax agent.

It’s important for you to know who is responsible for paying super before you hire a contractor as any such cost will need to be included in your budget. It will also impact on the amount you’re paying them  -  if your business doesn’t need to pay super you can afford to pay a higher hourly rate.

It’s recommended that you have a contract in place with your contractor, either provided by you or the contractor. Either way ensure you have a lawyer prepare or review the contract. You may be tempted to skip this step, after all you only need two hours of bookkeeping.

However, a contract is there to protect all parties. You want to ensure that confidential business information is protected, that your clients are not stolen, that there is a clear procedure if essential information is deleted etc.   Your contractor wants to ensure the terms of engagement and payment are clear. Think of you paying your lawyer as an insurance policy against future risk.

Other questions you’ll need to ask your new contractor include:

·        Are they registered for GST?

·        Do they have the necessary insurances, e.g. work place, professional indemnity, public liability?  Ask them for a certificate of currency from their insurer.

If you're not sure of what information you need from your contractor then have a chat with your accountant or business advisor.

Employee

When you hire an employee, you need to ensure that you comply with the Fairwork Awards. These awards set out the minimum wages and conditions an employee is entitled to. Click here to see a list of the awards.  At the top of that list there is a decision tool to help businesses find the correct award for the type of employee they’re hiring.

It is up to the hiring business to make sure they have the right award and are paying correct award rates.  These details need to be included in your employment contract.  Again, hire a lawyer to assist you with this contract.  Don't be tempted to download a cheap template from the internet as there are obligations you need to be aware of, e.g. award increases.

Logistics

Once you’ve hired your new team member there are various logistics to bring them smoothly into your business:

·        Register with the ATO to withhold tax from an employee’s pay

·        Set up your book keeping program to manage an employee - for both pay and super – or a contractor – for pay and super (if applicable)

·        Report every payment of wages or superannuation to the ATO at each payment time

·        Request a tax file number declaration from your employee, together with a super choice form and general personal information, e.g. next of kin

·        Implement an onboarding or welcome process for new staff, e.g. meet the team, procedure and policies, how to use the photocopier

·        Schedule performance reviews, 3 months for new staff then 12 monthly

·        Schedule checking any award rate changes after a year in the job for employees

·  Consider if your business needs to take out workers compensation insurance. Workers’ compensation provides financial support if a person is injured at work or becomes sick due to work. If both parties are in Australia, it is usually required. In some cases, contractors will also go on workers’ compensation. Go to AIHW for more information on workers’ compensation.

If you’re ready to bring on a team member, and need support to meet your obligations, book a 20-minute call with me to discuss how I can provide that support for you.  Book your call HERE.

DISCLAIMER

All visitors who use this site and blog and rely on any information do so at their own risk.  This blog is for general information purposes only.