Is your tech Start-up geared for the employee vs. contractor test in a new work-from-home world?
29 October 2020 | Minutes to read: 3

Is your tech Start-up geared for the employee vs. contractor test in a new work-from-home world?

By Nicholas Benbow

At William Buck we see plenty of exciting new tech enterprises with a product morphing from idea, through to prototype and then through to commercialisation. The common linking factor that connects these three phases is a team of developers that create and refine the product. We’ve continued to see these teams thrive through COVID-19 as they have been able to persevere, unabated, operating in a work-from-home world, to which many had already transitioned to before the pandemic took hold in Australia.

For these tech businesses, cash flows are typically tight and the future unknown, so how are they progressing in this uncertain environment? Many of them shy away from signing up employees, and with good reason: firstly, tech developers are there for a specific purpose – to build the solution so it is ready to be scaled. Secondly, Australia has a minefield of laws and regulations that are triggered upon the establishment of an employee-employer relationship. These businesses need to consider the following:

  • Managing a payroll system, including a PAYG regime and complying with Single-Touch Payroll (STP), Fair Work and annual and long service leave obligations;
  • Indirect payroll obligations which have specific complexities, including superannuation, payroll tax and fringe benefits tax; and
  • Compliance with Occupational Health and Safety (OHS) standards, which impose stringent personal liability obligations on founders and directors of start-ups.

Unsurprisingly, many tech start-ups therefore chose to engage with their developers as contractors and not employees. However, many pitfalls are written into Australian law that look past a simple supplier invoicing relationship, allowing a reinterpretation of when a shadow employer-employee relationship may in-fact still exist.

So, what can tech businesses do to ensure that they avoid these pitfalls? Jennifer Lau, who specialises in servicing tech companies at William Buck, provides the following general rules of thumb that aid enterprises to ensure that they continue to satisfy the contractor test in Australia:

  • Engaging with a corporate entity with valid and registered ABN (rather than a sole trader);
  • Making sure that the tech developer invoices for their work, tied to specific performance deliverables (i.e., tied to a project), and
  • Having a contractor agreement, specifying the services to be delivered against a specific project / scope of works.

Establishing a robust contractor relationship also has other benefits. William Buck’s R&D Tax Incentives and Government Grants lead director, Rita Choueiri observes from experience that having an Australian contractor relationship based upon project goals and milestones significantly aids in directly linking eligible expenditure to an R&D Tax Incentive claim.

“One of the drawbacks of an employee relationship is identifying what component of a timesheet of an employee is attributable to such eligible expenditure – when it is laid out as a milestone in an invoice that nexus is substantially simplified,” said Rita.

In-addition to this, a thoroughly vetted contractual relationship can also more cogently identify the rules of the engagement between both parties – rules which may be tested in the event of a souring of the relationship between those parties when contention may arise over authorship for the underlying technology.

Notwithstanding this, even observing these rules may not enable a tech business to completely avoid an employer-employee relationship. As more and more work is sourced to a work-from-home regime, particularly with OHS obligations, this area is becoming increasingly complex and fraught with danger for tech founders and directors.

Jennifer adds that a coordinated approach by both State and Federal governments in simplifying when a tech enterprise can confidently contract with a developer and not be caught under a myriad of red tape, is well overdue.

“Particularly if Australia wants to continue to be a leader in developing world-class tech companies,” said Jennifer.

If you’d like to understand whether your remote employees will continue to satisfy the contractor test, please contact William Buck.

Is your tech Start-up geared for the employee vs. contractor test in a new work-from-home world?

Nicholas Benbow

Nicholas is a Director in our Audit and Assurance division. He specialises in accounting for complex business transactions, including acquisitions, divestments and restructures, particularly in situations where a business is primed to realise its growth potential. Nicholas works closely with companies through the IPO process, assisting with Audit and strategic advice.

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