Salary packaging a flexible workforce

In today’s tight economy, especially in the project driven IT arena, flexible workforces and controllable costs are every corporation’s ideal. Permanent staff appears to be a lower cost option on the surface, until the redundancies and long service leave pay-outs are added, not to mention payroll tax, insurances, superannuation, annual leave and other salary on-costs.

Many corporations and agencies are favouring a flexible contract based workforce, but most individuals do not understand the pitfalls, or how to take advantage of the tax benefits available to contractors. The IR35 legislation in UK ant the new Alienation of Personal Services Income (APSI) laws in Australia, the so called 80/20 rules, has caused extensive confusion, and the BAS statements and ATO reporting requirements has scared off 30% of the contracting workforce.

Against this background, a new breed of salary packaging specialists has emerged over the past 10 years. Commonly known as “contractor management companies”, these organisations do not just visit HR managers or employees and suggest a few simple principles for effective salary packaging then leave the payroll department with the burden of implementation; they actually run the payroll and administer the detail, answer the questions and even take the employees off the corporation books if required.

Part of the entire corporate or agency payroll can be outsourced and administered separately. The services typically include payroll administration, salary packaging and tax guidance, legal structures for the payment of contractors and staff, global movement of specialists including facilitation of visas and international payments. With an increase in the need for a flexible global workforce, these services are increasingly becoming essential.

For these management companies, running payroll is a profit centre, rather than the cost centre that it represents in most corporations. The management companies recover their fees from tax savings, hence most individuals end up with more cash in hand , and are at least cost neutral to the corporation. In some cases, there are major salary on-cost savings to be had by the corporation.

These arrangements benefit both contractors and employers. Contractors are able to expense business related items (e.g. motor vehicles, computer hardware, computer software, mobiles, work related training, insurance, voluntary superannuation etc.) from pre-tax dollars, resulting in increased net remuneration and lifestyle benefits.

Corporations have a reduction in administration as well as the on-costs generally incurred through employment, (eg. Public Liability, Employers Liability, Payroll Tax, long service and sick leave). There is also less risk of litigation for the corporation as they are not seen as the “employer” under common law if the contractors are independent. Interesting enough, there is an improved employee - employer loyalty through enhancement of net benefits to these independent contractors.

It is a win for all concerned.


About the author

Dave Thomas is the founder and Managing Director of Consultants Exchange (CXC), a global IT contractor management company. He started his career in accounting and was seconded to the Information Technology area where he spent the next 30 years as a contractor, and entrepreneur. He is also founder Softpac and, a member of the Australian Computer Society (ACS) founding member of Australian Contract Professions Management Association (ACPMA), Associate member of the Information Technology Contract Recruiters Association (ITCRA)

Foundation Members