Why do employers make contractors convert to a company?

Posted by , October 28th, 2014

We get a lot of customers who are sole traders come to us saying they need to form a company so they can be awarded a contract. Converting from a sole trader to a company is relatively straight forward, the question is why do employers only want to deal with a company?

The first part to answering that question is that employers like to deal with contractors rather than employees for a number of reasons, namely they can avoid paying:

  • The superannuation guarantee
  • Annual leave, sick leave, long service leave
  • Payroll tax (for large employers)
  • Workcover insurance
  • Public liability / indemnity insurance

It also offers much greater flexibility in hiring and firing. The problem for employers is that its not as simple as saying to a sole trader give me your ABN and now you’re on a contract. The ATO specifies criteria where a worker can still be classified as a permanent employee or not regardless of whether they are on a ‘contract’ or not. Some of the reasons why someone may still be classified as a permanent employee would be:

  • They earn 80% or more from a single employer
  • They get paid by the hour
  • Work cannot be delegated. A particular person needs to turn up for work.
  • The worker’s hours are chosen by the employer
  • Work is performed at the employer

Obviously there is a lot of room for interpretation! To remove the large grey area where they may be penalised, employers force potential contractors to register a company. Doing this pushes all the obligations mentioned above onto the sole trader’s company while minimising the chance the employer will be penalised for contractors being classified as employees. That’s why they do it.

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