The Secret To Unlocking Job Creation Within Australian Small Businesses is NOT Scrapping Payroll Tax!

While the small business sector has been hit dramatically by the effects of COVID-19, they are also likely to be our ticket to economic recovery and job creation – but they will need a helping hand to do so.

The Federal Government appears to have recognised this with recent budget announcements tied to its JobMaker agenda and have started a cautious approach to IR reform. However, as I hope the following will attempt to point out, we need bipartisan cooperation with State and Territory governments across Australia to remove barriers that stand in the way of small business’ ability to grow and employ Australians.

Put simply, we need to remove the stranglehold of unnecessary red tape that makes it harder to employ people – and that includes payroll tax.

Unlike many others, I am not advocating for an abolition of payroll tax. There is an underlying appreciation that States and Territories need to protect their biggest source of tax revenue to provide essential services in the absence of any federation changes or raising the GST. However, there are some changes that I believe should be made to the payroll tax rules which will have one of the biggest positive impacts on job creation within small business.

What is considered a small business?

The Australian Bureau of Statistics (ABS) definition of a small business includes:

• non?employing businesses (sole proprietorships and partnerships without employees);
• micro?businesses (businesses employing between 1 and 4 people including non?employing businesses); and
• other small businesses (businesses that employ between 5 and 19 employees).

The ABS defines a medium-sized business as employing between 20 and 199 employees and large businesses as employing 200 or more employees. 

There are 1.49 million non-employing entities and over 823,000 micro-businesses/other small businesses in Australia (1-19 employees), compared to 61,000 medium/large businesses with 20 or more employees.

Overall, about a quarter of Australians currently work for a small business. 

Challenges faced by small business employers

Australia has a highly complex web of statutory obligations for employers – a system which does not instil much confidence in the average non-employing business or micro-business owner to take on the risk of employing people.

In my experience, the areas that cause the biggest issues for small business are:

• poorly drafted (or non-existent) employment contracts and policies;
• understanding Award coverage and paying employees correctly;
• interpreting the Fair Work Act;
• managing performance and avoiding unfair dismissal;
• new rules around engaging casual workers;
• handling employee grievances and complaints;
• non-compliant contractor arrangements (because they are perceived to be a way to get around the above issues);
• record keeping;
• an inadequate approach to managing work, health and safety;
• managing workers compensation claims; and
• attracting and retaining staff.

In some ways, Australians should be proud of the strong employment safety net that exists in this country but if we are to persist with this approach, small businesses are going to need more of a helping hand to confidently navigate it. This is why making small changes to encourage a PEO market to grow in Australia could be much more beneficial to all Australians instead of tackling divisive IR reform.

What is a PEO?

A professional employer organisation (PEO) is an end-to-end HR solution for small and medium-sized businesses that takes on the legal liability of employing staff on behalf of that business, similar to a labour-hire model, but without the expensive price tag.

PEOs are quite popular in the USA – and whilst there are some key differences between the employment landscapes of the USA and Australia (mainly around health care and benefits) – there is plenty of evidence which points to their role in boosting business confidence, performance and job creation.

A PEO will use its economies of scale (by employing thousands of workers on behalf of small businesses) and expertise to manage HR compliance, payroll, superannuation, taxation, workers compensation and provide HR support for workers in small businesses. Their business is employment. A small business will simply pay an invoice each month, inclusive of a wages, statutory on-costs and a service fee.

For example, Elaine runs a small online retail business selling homewares. She has built the business up from scratch. The business is growing, and she needs to hire her first worker. Elaine finds someone for the job, George. Elaine has a business profile with a PEO and simply provides them with the basic information about the worker to be onboarded. The PEO is then responsible for ensuring that George’s Award classification is correct, his pay is compliant and that he receives an employment contract from the PEO, workplace policies and induction information. Elaine provides supervision and instruction at work – and approves hours worked and leave requests. The PEO takes care of the rest. If Elaine is having performance or misconduct issues with George, she can contact the PEO’s HR partner who will assist her in dealing with that professionally and legally. If George has issues or grievances, they can be handled fairly through the HR support team of the PEO. If George is subsequently terminated, Elaine can not only be confident that she has followed the right process, the PEO will also handle any unfair dismissal claim should it arise.

PEOs give small businesses the confidence to hire employees – and at the same time give those employees access to benefits normally reserved for larger employers.

It is a win-win-win-win all round for employers, employees, communities and the government.

If this all sounds too good to be true, well it is! There is one thing which stands in the way of making this a reality for small businesses in Australia – State and Territory payroll tax.

Payroll tax in Australia

Payroll tax is managed on a State and Territory basis in Australia and is assessed on wages paid by an employer to its employees when the total wage bill of an employer (or group of employers) exceeds a threshold amount. The payroll tax rules are harmonised nationally but the payroll tax rates and thresholds vary between States and Territories. Typically, small business employers are largely exempt from payroll tax (with the exception of Victoria) due to the tax-free threshold amount applying in each State or Territory. Certain types of employers (such as charities) and employees (such as apprentices and trainees) may also be exempt from payroll tax.

The tax-free threshold can only be claimed once and is reduced based on the total size of wages and super paid to all employees across Australia in one business (or a group of businesses) – not just in each State or Territory. So, as a larger employer, a PEO will most likely be paying payroll tax on every worker’s wages and super who are employed and engaged with a small business, even when that small business would otherwise be under the tax-free threshold themselves. The tax (between $300 to $423 per month for the average earner) kills the value proposition for any small business to use a PEO – despite the other benefits outlined earlier.

What is the solution?

If we allow each small business to claim their payroll tax-free threshold through a PEO – in a similar way to how employees are able to claim their PAYG tax-free threshold via one employer – we can allow a PEO industry to support Australian small businesses navigate the complexity of employment and encourage job creation.

As noted, some employers are exempt from paying payroll tax due to their status as a charity, religious organisation, non-profit hospital or public benevolent institution. There is also an extension to this which allows an employment agency (such as a PEO) to exempt certain wages from payroll tax where those employees are engaged exclusively to perform work for an exempt business. This requires a declaration by the exempt business to the agency and for it to be kept for 5 years.

What is proposed is that a small business could use a similar declaration to confirm that they will exclusively exhaust their payroll tax-free threshold with the employment agency. The employment agency would need to be registered with the relevant State or Territory revenue offices to demonstrate their capability in managing this on behalf of those agencies – with penalties to the small business and/or employment agency for providing a false declaration.

Importantly, this does not extend to all employment agency arrangements, such as traditional labour hire, as the businesses in those instances would not use such services on an exclusive basis. As a result, there would be no negative impact on current payroll tax revenues. In fact, revenues would likely increase by encouraging small business to exceed thresholds (and pay tax) and/or by charging a levy on registered employment agencies under this proposal.

10 benefits to Australia from removing the red tape around PEOs

If these changes were made possible, I believe that there are 10 key benefits to Australia from a flourishing PEO industry:

1. Fair Work Compliance: In the last year, 71% of employers audited by the Fair Work Ombudsman were found to be non-compliant – many of which are likely small business employers trying to do the right thing but being caught out by not applying terms in a technically correct manner. PEOs can provide an affordable solution to small businesses and their workers that guarantees Fair Work compliance.
2. Tackle Unemployment Challenges: There are currently over 900,000 Australians who are unemployed. If a PEO could help just over 10% of Australia’s non-employing entities employ their first worker every 12 months that would create over 150,000 new jobs every year alone. An established PEO industry will also be much better placed to match potential workers with real jobs in Australia’s small business sector than private recruiters operating under the current Jobactive system – which costs the Australian public more than $1.5bn every year.
3. Tackle Underemployment Challenges: The ABS defines underemployment as “employed persons aged 15 years and over who want, and are available for, more hours of work than they currently have”. There are currently 1.4 million Australians who fall into this category. Under a PEO arrangement, an employee can easily work for 2 or more businesses at one time (and be taxed as if they were working with one employer). This type of scenario is becoming more prevalent in the new world of remote work – a digital marketer can be based in Byron Bay and work for a professional services business in Melbourne and an engineering firm in Perth. At a more localised level, an individual can easily work hours for a fruit shop and the local pub in the same week – and have access to the same benefits and HR/payroll support.
4. Improve Workforce Participation: There can be a broader approach to assisting those people who face specific challenges to entering the workforce. This includes the long term unemployed, mature age workers, Aboriginal and Torres Strait Islander people, youth and people with a disability. PEOs can implement practices and set objectives similar to that of other large employers around diversity and inclusion – but targeted towards opportunities inside Australia’s SMB sector (where most jobs exist).
5. Match Australian Workers with Global Businesses: PEOs can also play a key role in helping global businesses find and engage Australian talent. This could be an overseas business expanding into the Australian market for the first time – or help Australians work remotely from our country for an overseas business – legally and ethically with taxes remaining in Australia.
6. More Robust Work, Health & Safety Controls: The PEO (employer), small business (host employer) and employee all have a duty of care when it comes to workplace safety. The PEO’s responsibilities will ensure that the workplace is safe and risks are managed, ensuring that workers have the required skills and training to perform the job safely, suitable induction has taken place, verifying that safe work instructions (where necessary) are provided to the worker and facilitating consultation on safety matters.
7. Improve Workers Compensation Scheme Performance: For most small businesses, a workers compensation claim may only occur once every few years – but when it does happen, they often struggle with the multiple stakeholders involved in a claim and are more disrupted by any time lost due to illness or injury than larger employers. Typically, small business employer’s workers compensation premiums are not impacted by claims cost. But the cost of claims is borne by the scheme, which is reflected in overall premium rates. PEOs are much better equipped to manage workers compensation claims, injury management and return to work – minimising the total cost of claims. As a larger employer, they are incentivised to do so, which in turn leads to better outcomes for the overall scheme.
8. Better HR Practices in Small Business: In the USA, employees working in businesses that are PEO clients are significantly more likely to report that their place of work demonstrates a commitment to them as employees, has good hiring practices, has good HR policies and practices and provides employees with good training and development opportunities.
9. Move to Single Touch Payroll: Micro-businesses (1-4 employees) have until the 1st July 2021 to move to Single Touch Payroll (STP) digital reporting of employees’ salary and wage information, tax and super information to the ATO each time they pay their employees. This means they will be required to adopt new payroll software if their current process is inadequate. If a PEO solution was accessible and affordable to a micro-business, this would all be handled by a PEO that is STP-ready right now.
10. Employee Benefits and Access to Support: For employees, they get the best of both worlds – work within a nimble and exciting small business and get access to the same benefits of a large employer. Employee benefits can include a PEO-sponsored Employee Assistance Program (EAP). Suicide is the number 1 cause of death for people aged between 15 and 44 in Australia and an EAP plays an important role in supporting employees confidentially with their mental health and wellbeing – both inside and outside of work.

The result of these proposed changes is that small businesses gain more confidence to get on doing what they do best – growing their business and increase job opportunities for Australian workers.

Interstate cooperation – likely via the Board of State & Territory Treasurers – is critical to advancing our national interest.