Did you know you may need to be paying super to your contractors?

Does your business or organisation engage independent contractors? Did you know that independent contractors who are engaged to service your customers or clients can be entitled to superannuation contributions from you as their “deemed employer”?

There has recently been a lot of regulatory attention concerning deemed employment and superannuation.

If you are not aware of this and you engage independent contractors, it is crucial that you urgently review your independent contractor agreements. Getting this wrong may prove to be a very costly exercise.

Before we examine whether an individual is entitled to superannuation contributions, let’s first unpack the law in this area generally.

Employee or Contractor?

As a rule of thumb, an employee works in and is part of your business, whereas a contractor has their own business and completes work for your business. In some cases, however, it cannot be obvious, especially when an individual has a service or contractor agreement in place, so the Courts have formulated a multi-factor test to help determine when a worker is an employee or Contractor.

Some of the factors included in the test include:

The employee can’t subcontract or delegate their work, whilst a contractor can pay someone else to do the work.
An employee does not operate independently of your business. A contractor is operating their own business independently of your business and may perform services outlined in their agreement or contract and are free to accept or refuse additional work.
A contractor will work for other parties and not solely on your business.

For more information and a list of all the factors, read our article ‘Have you classified your workers correctly?’

So, if your Independent Contractor should be classified as an employee, then they are certainly entitled to superannuation.

If you still believe you have an independent contractor on your hands, we suggest you keep reading as they may still be entitled to super under the deeming rules in the Superannuation legislation.

Is my Contractor entitled to receive superannuation?

The Superannuation legislation (the Act) includes an expanded definition of who will be considered an “employee” for the purposes of receiving a superannuation contribution into their nominated fund.
This extends the reach to individuals engaged under an independent contractor arrangement. In summary, section 12(3) provides that:

“If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract”.

What does this mean? In simple terms, it means that if the individual is solely responsible for performing the service they are engaged to provide and can’t subcontract or have someone else do it on their behalf, they are considered an employee under the Act.

Are there any exemptions?

There are only a few exceptions to the obligation of an employer (including a deemed employer) to pay superannuation contributions. These are:

domestic work for less than 30 hours per week, for example, nanny arrangements.
where the deemed employee receives less than $450 per month (note that this exemption does not apply from 1 July 2022); or
where the deemed employer engages the deemed employee through a separate legal entity, such as a company.

What is the ATO’s position on this?

Superannuation Guarantee Ruling SGR 2005/1 outlined that the definition of employee is “expanded” when it comes to superannuation.

In SGR 2005/1, the ATO have confirmed that when:

the individual is remunerated (either wholly or principally) for their personal labour and skills
the individual must perform the contractual work personally (there is no right of delegation); and
the individual is not paid to achieve a result,

then in these circumstances, the contractor will be deemed an employee and superannuation must be paid by their deemed employer to their nominated superannuation fund.

What do some of these terms mean?

The words ‘wholly or principally’ are used to limit or restrict the types of contracts that will be covered by subsection 12(3). If the contract is partly for labour and partly for something else (for example, the supply of goods), then they are considered an employee if the main purpose of the arrangement is mainly or chiefly for labour.

The use of the term “wholly or principally” for the supply of labour also ensures that contracts performed to give a particular result are excluded.

What if the Contractor has an ABN? Do I still need to pay them superannuation?

The ATO states that an individual with an ABN may undertake a contractual engagement of services and yet still be an employee under the Act, as the Act extends beyond the common law for employees.

What should I do if my contractors are ‘deemed employees’?

You must comply with all statutory requirements if you believe your independent contractors may be ‘deemed employees’. Failure to do so means that you will be liable for the superannuation guarantee charge, which is made up of:

the total of the employer’s superannuation guarantee shortfall (essentially, the amount you should have paid but failed to pay;
a nominal interest component of 10% per annum; and
an administrative charge (note this can be up to 200% of the outstanding liability).

As an employer, you are therefore liable to a substantial charge if you fail to comply with superannuation requirements. This includes historical arrangements.

Remember that the test for whether someone is an employee will vary depending on what legislative purpose you are considering the engagement. Just because someone is an independent contractor under general law, doesn’t mean that they won’t be a deemed employee for superannuation purposes or visa versa.

How can Morrows help?

If you believe you may have a historical superannuation liability to independent contractors, we recommend you start with having your independent contractor arrangements reviewed, specifically any contracts that are in motion or active. If there is an exposure, a voluntary disclosure to the ATO may be required.

Morrows Legal Solutions can assist with reviewing your arrangements and preparing and managing the voluntary disclosure process, if required, to minimise administration costs and associated legal risks.