Is a contractor really an employee? What are the dangers associated with not getting the paper work right?

Robyn, a dentist, contacted me recently. She was "employed as a contract dentist" in a busy suburban dental practice. She was looking at buying the dental practice.

Robyn worked her own chair in a room in the surgery, alongside Graham who worked in another room. Whilst this seems simple we pointed out a glaring problem.

The owner of the business was not treating Robyn and Graham equally. Whilst they, on the surface, were equal with income earned by the chair shared 50% each with them and the owner of the dental practice.

The important difference was that Robyn ran her operation through a company whilst Graham operated as a sole trader with an ABN.

Again this may seem ok, but now here are the problems.

As Robyn operates as a company she is required to pay superannuation and workers compensation on wages she pays herself. These may total 10%.

Graham, on the other hand as a sole trader is not required to make such payments. So Robyn is out of pocket by 10% compared to Graham.

But the real issue and possible surprise is that Graham is deemed to be an employee of the business owner. As such the owner is responsible for the payment of superannuation and workers compensation insurance on all payments to Graham.

Just after we looked at the business on behalf of a Robyn the owner was subject to a tax audit. The outcome was that he was required to pay super contributions for Graham. The killer was these payments were made after the end of the quarter they belonged to and the owner was denied a tax deduction.

Now the differential gap has increased to around 20%.

An expensive exercise for the owner. Robyn was compliant ... But Graham was the real winner.

The moral of the story is that not all is as it seems. A contractor may in fact be an employee.

Get the structure right in the first place ... or be prepared to pay the price.