Labour Hire vs Subcontractor in Residential Construction

What it is

Labour hire and subcontracting look similar on a site. A worker turns up, swings a hammer, leaves at knock-off. The legal and tax treatment is very different. Getting it wrong exposes the builder to back-paid superannuation, payroll tax assessments, workers compensation gaps and personal director liability.

A labour hire arrangement is a tripartite relationship. The builder contracts with a licensed labour hire agency. The agency employs the worker. The agency pays wages, withholds PAYG, pays super and holds workers compensation cover. The builder pays the agency an invoice.

A subcontractor relationship is a direct two-party contract. The builder engages another business to deliver a defined outcome, such as fitting out a kitchen or framing a roof. The subcontractor runs their own enterprise, holds their own ABN, supplies their own tools and may delegate the work.

The control test and why classification still trips builders up

The High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek shifted the test toward the written contract terms. Where the contract is genuine and not a sham, the rights and obligations spelled out on paper drive classification. That said, the Australian Taxation Office still applies a multi-factor test for tax purposes. Factors include the degree of control over how the work is done, whether the worker bears commercial risk, the right to delegate, who supplies tools and the basis of payment plus integration into the business.

A genuine subcontractor in residential construction usually:

• Quotes a fixed price for a defined scope
• Brings their own tools, vehicle and materials in many cases
• Carries their own public liability insurance
• Can subcontract or delegate parts of the work
• Invoices on milestones or completion
• Works for multiple builders

A worker who looks like a subcontractor on paper but takes daily direction from the builder, uses the builder tools, gets paid by the hour, cannot delegate and works for only one builder is at high risk of being reclassified as an employee.

PAYG withholding

For labour hire workers, the agency withholds PAYG and remits to the ATO. The builder pays a tax-inclusive invoice.

For genuine subcontractors who quote ABNs, no PAYG withholding is required if the work is part of the contractor enterprise. If a contractor refuses to quote an ABN, the builder must withhold 47 per cent under the no-ABN withholding rule.

The Taxable Payments Annual Report (TPAR) applies to residential builders who make payments to contractors for building and construction services. Each contractor payment must be reported to the ATO by 28 August each year.

Superannuation Guarantee

Labour hire agencies pay super on the workers they employ. The builder has no SG liability for those workers.

Subcontractors trigger SG where they are paid mainly for their labour under a contract for the contractor personal services. The expanded definition of employee in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 catches contractors who:

• Contract mainly for their own labour and skills
• Perform the work personally without a real right to delegate
• Are paid by the hour or for time worked rather than for a result

A roof carpenter paid an hourly rate to swing a hammer alongside the builder employees almost always triggers SG even if they hold an ABN. A roofing company that quotes a fixed price to install a roof on a turnkey basis usually does not.

Workers compensation

Each state runs its own scheme. NSW icare, WorkSafe Victoria, WorkCover Queensland and the equivalent bodies in WA, SA, TAS, ACT and NT each have their own deeming rules for contractors. In most schemes, a contractor who is in substance a worker is included in the builder remuneration for premium purposes.

For labour hire, the agency holds the policy. The builder still has duties under the Work Health and Safety Act 2011 because the worker is performing work for the builder.

Payroll tax exposure

State payroll tax laws contain deeming provisions that pull contractor payments into the wage base unless one of the prescribed exemptions applies. Common exemptions cover work performed for 90 days or less in a financial year, services not ordinarily required by the principal and contracts where multiple workers are supplied.

Practical guidance

Pick the structure first, then write the contract that matches. Brief site supervisors so they treat the worker consistently with that structure. Keep ABN records, insurance certificates and signed contracts in the project file. When unsure, the ATO employee or contractor decision tool gives a written outcome the builder can rely on if circumstances do not change.