Avoiding a Super Sting
One of the statements we often hear from business owners who ask us to prepare a contractor agreement is that they want to engage the worker “as a contractor” because contractors are not paid superannuation or “our accountant has said that it is better to have the person as a contractor because then we don’t have to pay superannuation”.
The superannuation myth
After all, the compulsory superannuation contributions are paid by employers to the employees – right! But is that right?
The eligibility for compulsory superannuation contributions is usually discussed in terms of employee eligibility and hence, people commonly assume that the obligation to pay compulsory superannuation contributions is limited to an employer/employee relationship.
We recognise the differences between contractors and employees and the numerous cases that detail how to identify whether a worker is an employee or contractor. The Fair Work Act 2009 (FWA) deals with national system employees and the obligations owed to them.
What people often forget is that other legislation sometimes expands the concept of who will be treated as an employee for specific purposes. Workers compensation is one such example and, for particular purposes, a worker will be treated as entitled to workers compensation even though they are not, employees at common law or for the purposes of the FWA.
Who is entitled to super contributions
Similarly, the Superannuation Guarantee (Administration) Act 1992 (SGAA) – the legislation that establishes the statutory entitlement to compulsory superannuation contributions – expands the concept of who is an ‘employee’ for the specific purpose of the entitlement to compulsory superannuation contributions.
The SGAA provides that while employer and employee have their ordinary meaning, for the purposes of superannuation entitlements, the SGAA may expand the meaning of ‘employee’. It does this by providing that, “if a person works under a contract that is wholly or principally for the person’s labour, the person will be an employee” for superannuation purposes.
Contractors are persons who work under a contract. If the contractor agreement is wholly or principally for the contractor’s labour, then despite the fact that the person is a contractor at common law or under the FWA, the person will be an employee for the purposes of entitlement to compulsory superannuation contributions. Hence, contractors may be entitled to compulsory superannuation contributions if the contractor agreement is wholly or principally for their labour.
The contractor dentist case
The effect of this was highlighted in a decision of the Full Court of the Federal Court of Australia (a decision that was upheld by the High Court of Australia in its decision to refuse special leave to appeal).
The decision dealt with whether a dentist – who was held to be an independent contractor (and therefore not entitled to paid annual leave) was nevertheless, an employee for the purposes of the SGAA and therefore entitled to compulsory superannuation contributions.
The Full Court held that the contract under which the dentist worked was to provide dentistry, practice management and, when requested, assistance to the Dental Corporation to guide it on how it should provide the Administrative Services to him. The dentist’s obligation to provide personal services as a dentist, as a manager and so forth may be said to be ‘for labour’. On that basis, even though the dentist was held to be a contractor, the dentist was entitled to be back paid the unpaid superannuation contributions payable under the SGAA.
So, do not engage someone as a contractor in the belief that you will therefore not have to pay superannuation contributions to them without thoroughly evaluating your options. Some contractors – those wholly or principally engaged for supplying their time and skills – their labour – will be entitled to superannuation contributions.
What to do?
- Review your current contracts with any contractor and identify whether the person is wholly or principally providing their labour. This will help identify your potential risk for claims of unpaid superannuation contributions.
- If you are proposing to engage someone as a contractor, ask yourself why you want to engage the person as a contractor. If it is to avoid superannuation contributions, you will need to explore further whether the person – despite being a contractor – may be entitled to superannuation contributions.
- If you decide that a person will be engaged as a contractor, consider what the contractor is to provide under the contractor agreement. If they are to provide “wholly or principally their labour”, especially if you are going to pay an hourly rate, you should also be aware that you may also have to pay superannuation contributions on top of the hourly rate. The contractor agreement may provide for a portion of the contractor’s hourly rate to be paid to the contractor by paying the contractor’s complying superannuation fund.
Minimise your risk
If, after you review your contractor agreements, you believe you have contractors who may be entitled to superannuation contributions and they have not been paid, contact us to discuss the options for minimising or eliminating the risk of a claim for unpaid superannuation contributions. You may also need to modify your contractor agreement to factor in payment of superannuation contributions in the future.
If you are unsure if a particular contractor is an employee for the purposes of superannuation, contact us. It could save your business significant money (interest and penalties on unpaid superannuation contributions).
Queries
For further information regarding the above, please contact the author or any member of our Employment, Workplace Relations & Safety team.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.