Your Superannuation Obligations – Employees vs Contractors

Many businesses understand that employees and contractors are treated differently – but to what extent? While superannuation is an entitlement typically associated with employees, there are circumstances where it is owned to contractors too.

Contractor or Employee?

The first step in determining whether a worker is entitled to superannuation is to differentiate between an employee and a contractor at “common law”. Whether an individual is engaged by an organisation as an employee or a contractor determines the parties’ rights and obligations.

The typical traits of a contractor include:

• Payment is made to achieve a result (which has been taken to exclude jobs that are charged on an hourly rates basis).
• Provision of all or most of the necessary tools to complete the work.
• The right to delegate/subcontract work to others.
• The contractor bears the risk of rectifying defective work or injury.

The key attributes of an employee include:

• A high degree of control by the principal over the work being performed by the employee (to the extent that the principal manages what work is performed and how the work is performed).
• Wearing the principal’s uniform.
• Regular and ongoing ‘wage’ payments (weekly/ fortnightly/ monthly).

If it is determined that a person is an employee at common law, that person is an employee under the Superannuation Guarantee (Administration) Act 1992 (SGAA) and will be owed superannuation.

The Superannuation Guarantee Administration Act (SGAA)

Even if a worker is taken to be a contractor at common law, there is a statutory test to determine if the individual is entitled to be paid superannuation by principal.

The SGAA test states that an employee for the purposes of superannuation is a person who: “works under a contract that is wholly or principally for the labour of the person.”

In 2005, the ATO released a ruling that a contract is considered to be wholly or principally for the labour of the person engaged if the terms of the contract and the conduct of the parties have all of the following characteristics:

a) The individual is remunerated (either wholly or principally) for their personal labour and skills.

b) The individual must perform the work personally (there is no right of delegation).

c) The individual is not paid to achieve a result.

The ATO ruling outlines that if one of the above characteristics is absent, the individual is not owed superannuation.

Workers can be an independent contractor and you are not obliged to pay superannuation if all of the following also apply:

1. The extent of control you have over the worker is limited. The worker makes the decision on how many jobs to accept.
2. The worker is paid on a results basis based on an oral/written contract between your business and the worker. To be paid, the worker has to produce a result.
3. The worker bears the commercial risk and responsibility of poor workmanship or work injury, and has their own insurance for this reason.
4. The worker provides their own tools, place of business and could choose to use materials available from your business.
5. The invoices submitted to your business discloses the jobs undertaken and are identified by the place at which they arose.

If any of the above conditions do not apply then you are expected to pay superannuation.

Tips for employers

Prior to entering into a contract or agreement with a worker, it is important to determine (and we can assist you with) the following:

1. Whether the organisation is engaging an employee or a contractor at common law.
2. Appropriate documentation: the relationship between the worker and the organisation should be documented, in accordance with the terms and conditions appropriate for an employee or contractor (i.e. an Employment Contract or Independent Contractor Agreement).
3. If the person is a contractor at common law, further consideration is necessary to determine whether the contractor is covered by the expanded definition of an ’employee’ under the SGAA.

How we can help

With experience across a range of taxation and accounting services, Fortis Accounting Partners can assist in structuring labour contracts and arrangements, as well as a range of advisory services.

We are constantly engaging with the Australian Taxation Office to put our clients up to date with the latest superannuation obligations, payroll tax and WorkCover obligations. Through our breadth of knowledge, we can provide our clients with the services and solutions their business requires.

If you would like further information on structuring superannuation for your workers, please don’t hesitate to get in touch with the team here at Fortis Accounting Partners.  You can reach us on 02 9267 01088, or via info@exemplary-financial.flywheelsites.com.