What You Need to Know
Are Your Independent Contractors Actually Employees?
Independent Contractor Agreements are used frequently in the real estate industry, having many advantages for both the principal and the agent. However, it is important to ensure that the independent contractor relationship qualifies as a true independent contractor relationship.
In contrast to an employee, an independent contractor must be able to operate completely independent from your business including, managing their own business expenses, paying taxes, insurances, GST and hiring their own employees. The independent contractor should enter into agency agreements directly with vendors, and act in conjunction with your agency on the sale of a property.
Ensuring Compliance With State and Federal Tax
To ensure compliance with state and federal tax and employment laws, specific factors must be met by your agency and the independent contractor to validate an independent contractor agreement.
These include, but are not limited to:
- Company Structure: Independent contractors should operate under a company structure, with the agent being the director of the company. The company of the contractor will issue you with a tax invoice made out to the vendor upon completion of a sale for payment of commission.
- Licensing Requirements: The contractor’s company should hold its own corporate real estate licence, with the agent being a class 1 licence holder and licensee in charge of the company.
- Staff: The independent contractor must employ two or more employees to perform the real estate work that the independent contractor is engaged to perform.
- Insurance: Independent contractors must maintain workers’ compensation and professional indemnity insurance.
- Independence: Independent contractors must demonstrate independence in their work methods, business structure, and attendance of training or meetings cannot be made compulsory.
- Incentives: The agreement should not include incentives that mimic employment relationships, for example bonuses.
Various tests and guidelines are utilised by the ATO and Courts to determine if a worker qualifies as an independent contractor. A court will look behind any agreement and characterisation of the relationship to determine the true nature of the relationship. Even if the contractor has their own staff and operates under their own company structure, they may still be classified as employees.
In the event that the ATO deems the independent contractor agreement to be a “Sham Contract”, the contractor will be entitled to unpaid wages, superannuation and leave entitlements, and the principal may have potential payroll tax liabilities. It is therefore important to safeguard your business by ensuring that you have an appropriate contractor agreement in place and implement a compliant system in your agency to ensure that the legal requirements are met for your independent contractors.