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How to Hire and Pay Contractors in Australia: An Easy Guide for US Companies

Find out how to quickly pay contractors in Australia with this easy guide for US companies. If you're looking to tap Australian talent, then this is a must-read!

Uluru-Kata, Tjuta National Park, Australia

Jade MacRury

Published on July 29, 2022

How to hire and pay contractors in Australia: An intro 🇦🇺

You might consider the Land Down Under if you want to expand your US-based company globally. However, before you start working with Australian talent, you need to know how to hire and pay contractors there.This guide will give you an overview of the pros and cons of hiring Australian-based contractors, what independent contractors are, how they differ from employees, and what options you have to pay them as quickly and efficiently as possible.

The Pros: Why hire contractors in Australia?

Hiring contractors based in Australia means you get to enjoy the following benefits:
  • A stable economy with close access to Asian markets,
  • A robust employment system that caters to both workers and business owners,
  • A GDP per capita that currently ranks 18th in the world,
  • A highly skilled and educated workforce that also speaks English natively, and
  • A location that means your contractors work an opposite day shift, allowing for 24-hr-shift coverage (perfect for those working in customer service!).

The Cons: Why you shouldn't hire contractors in Australia

The main downside to hiring contractors from Australia is that talent comes at a steep price because of factors such as the national minimum wage and the high cost of living.In addition, you also may be hit with high currency exchange rates that drive the price even higher.
Sirius Building from the Harbour Bridge, Australia
Photo by Berenice Melis / Unsplash

Employee or contractor: What's the difference in Australia? ❓❓❓

In Australia, knowing if you're hiring an employee or an independent contractor is incredibly important (we'll discuss why in the next section).Like in other countries, no single defining factor distinguishes an employee from an independent contractor. The Australian government looks at the following:
  • How they get paid and who pays the tax,
  • Entitlement to benefits,
  • Notice periods and severance pay, and
  • Working relationship.

How they get paid and who pays the tax

An Australian employee typically gets added to your payroll. They get paychecks from which you withhold their tax payments and superannuation contributions.On the other hand, you can pay an independent contractor per project or contract. They receive the total gross pay stipulated in their contractor agreement and then pay their own taxes. They also make their own superannuation contributions.

Entitlement to benefits

In addition to taxation and superannuation contributions, Australian employees have 11 national minimum employment entitlements according to the National Employment Standards (NES):Australian employees are also entitled to health insurance.On the other hand, contractors aren't often entitled to paid benefits and would have to make their own arrangements. For example, they're not usually covered by worker's compensation and have to ensure that they have income protection insurance.

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Notice periods and severance pay

If you're working with an Australian employee and need to terminate them, you must give them notice or payment in lieu of notice. If an employee's role is no longer needed and the employee is made redundant, they're entitled to redundancy pay (also called severance pay).The specifics (e.g, the length of the notice period or the amount of severance pay) vary based on several factors (e.g., the employee's tenure, in the case of redundancy).Once again, contractors don't often receive these benefits.

Working relationship

In addition to the points above, you can differentiate between employee and independent contract employment classification by looking at the working relationship as a whole.Does the person you hired work for themselves or your company? If the former, they are likely an independent contractor. If the latter, they are likely an employee.Contractors are also often hired to complete a certain task for a specified period of time while an employee provides ongoing service.

The difference between employees and contractors, according to the Australian Taxation Office

According to the ATO, the following factors can help you differentiate between contractors and employees:
  • Employees cannot typically subcontract or delegate work. Contractors, meanwhile, can do so as they see fit.
  • Employees often receive regular wages, salary, a commission, or a fee for their work. On the other hand, a contractor's basis of payment usually involves receiving payment in return for an invoice or a quote submitted.
  • Unlike contractors, employees often don't have to buy or provide their own tools as they have access to company resources.
  • Contractors take commercial risks when they work with a company because they are essentially running their own business. Employees, on the other hand, assume no such risks.
  • Contractors can choose when, where, with whom, and how they work. Employees have less control over their work. They do what is asked of them by their employers.
  • Their working arrangement also differs. Contractors tend to work independently because they work for themselves. Employees do not.
It may sometimes be difficult to distinguish between an employee and a contractor. If you need more help determining which one you're hiring and the benefits they're entitled to, use the ATO employee/contractor decision tool.

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Employees vs. contractors: The importance of correct classification 🆚

In Australia, misclassifying the status of a worker can have severe consequences.As you can see, Australian employees enjoy legal protections and relatively comprehensive benefits that independent contractors don't.According to business.gov.au, sham contracting refers to the practice of "disguising an employment relationship as a contractor relationship...to avoid certain taxes and their responsibility for employee entitlements." This is punished with large sums of financial penalties ranging from thousands to millions of dollars.Note: Currently, the maximum penalty is AU$13,320 for individuals and AU$66,600 for corporations, but when the misclassification has gone undetected for years or involves many workers, the fines imposed can increase exponentially.If your needs are complex, it's advisable to seek independent legal advice before you hire a worker based in Australia.Once you're confident that you need to hire a contractor, you will need to know how to hire and pay them.We'll go through these in the next section.

How to hire contractors in Australia: A few things to remember 📝

You will see from the previous section that you must carefully follow the legislation that protects Australian-based contractors.For example, the Independent Contractors Act of 2006 enables contractors to ask Australian courts to review contracts that may seem excessively harsh.The independent contractor agreement is one of the most important things you need when hiring a contractor. It's highly recommended that you have fair written contractor agreements, despite local employment laws allowing for both written and verbal contracts.When you create your written contractor agreements, make sure they include:
  • The scope of their work and your expectations,
  • Their pay (in Australian dollars),
  • Any tax considerations (see next section),
  • Working arrangements, and
  • Which country's rules and regulations apply to said contract.
Specify what benefits you're offering them, keeping in mind that they're ineligible for many statutory entitlements and don't often fall under Australian modern awards or enterprise agreements.If you need help drafting a written agreement, check out business.gov.au.To avoid accusations of misclassification, make sure your contractor agreements are very different from employment agreements. Use this employment contract tool to guide you.Note: While they must be distinguishable, contractor and employment agreements must be equitable, according to the Independent Contractors Act 2006.

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Tax considerations when paying Australian contractors 🤔

According to the ATO website, "Australia has tax treaties with more than 40 jurisdictions," including the United States, so the contractors you hire will not have to worry about double taxation.Also, remember that contractors can claim tax deductions employees cannot. Such business-related tax advantages often offset the lack of benefits and leave entitlements.It's also important to check if your contractor has their own ABN or Australian Business Number. It's a legal requirement.Finally, because contractors are in charge of their taxation and they're not entitled to many government benefits, you won't be required to make any social security and tax payments on their behalf.That said, they are liable for income tax if their income exceeds the threshold and will have to make regular payments to the government. If this is the case, you may agree to withhold income tax for them via Australia's Pay As You Go system.Note: Both contractors and employees are eligible for income tax. However, contractors are taxed at the company rate, which is often lower than the employee rate.

Where can you hire Australian contractors: Some tips 🕵️

Hiring Australian contractors means knowing where to find good leads for great candidates.Some obvious choices are big sites like LinkedIn, Seek, Indeed, and Jora.Alternatively, you could advertise on Flexjobs, We Work Remotely, Working Nomads, and Dynamite Jobs.Finally, you could tap into your professional network and get referrals from them.

How to pay independent contractors in Australia: Eight different ways 8️⃣

In this section, we'll talk about eight ways you can pay contractors based in Australia and some of their biggest advantages and disadvantages.

Bank transfer

A bank transfer may be the way to go if you're hiring a contractor based in Australia and your company is also registered in Australia. In this case, you simply open a corporate bank account, from which you would pay your independent contractors.Unfortunately, unfavorable bank-to-bank currency exchange rates combined with bank charges often make sending recurring payments more expensive.

Global wire transfer services

You could also use a global wire transfer service, another convenient yet costly option. You'll have to contend with bank fees and exchange rates, which can be a lot if you send recurring payments.However, they are fast and secure.

International money orders and checks

Want something traditional, time-tested, and reliable? This option could be for you.The downside? It's slow and inconvenient. International money orders and checks require you to purchase them and your contractor to deposit them (physically) in their bank account.

Digital wallets

You could try a digital wallet like PayPal if you want something fast. They are ultra-convenient and certainly quicker than the other options mentioned above.They also work well if you're sending money to Australia.However, they have a few significant drawbacks. For example, according to this HP article, PayPal can suspend your account and freeze your funds for months if they find that you’ve violated their terms and conditions, its customer service can be a little hard to reach, and its fees can be astronomical.

Legal Disclaimer:

The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.

Different crypto coins together in the dark
Photo by Kanchanara / Unsplash

Cryptocurrency

Another alternative you could try is paying using cryptocurrencies such as Bitcoin, Tether, and Ether. Cryptocurrencies and crypto exchanges became legal in Australia in 2017.While it could be very convenient, paying in crypto comes with a few pitfalls. Arguably the most important is that, despite their rising popularity, they're still relatively obscure.The tax implications of receiving cryptocurrency as payment for services rendered may be too complicated for your contractor, so they may refuse this payment method.

Payroll platform

Because your contractor will likely submit invoices instead of being on your payroll, paying them could be time-consuming. However, a payroll services company like Pilot will allow you to set up automated payments to pay your contractors.One potential downside to this option is that, depending on the platform you choose, it could be expensive, so it may not be ideal for a small business. Having said that, Pilot’s contractor plan is actually affordable and charges for active contractors only. This may be an ideal option for you, especially if your company is new to remote workers in Australia.

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When your US-based company is ready, reach out to Pilot. We help you hire and onboard Australian-based team members quickly and compliantly through our secure platform.

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