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 owed to contractors too.
Differentiating between an employee and an independent contractor is important to businesses particularly with the significant economic shift to outsourcing.
The classification can impact on a business’ obligations regarding PAYG withholding, employee entitlements, superannuation contributions, payroll tax and WorkCover. The starting position in determining whether a worker is an employee or a contractor is the “common law”. However there are also specific statutory tests.
For the purposes of superannuation, the Superannuation Guarantee (Administration) Act 1992 (SGAA) expands the definition of “employee”. The effect of this is that a wider class of workers are entitled to superannuation contributions.
Accordingly, for superannuation purposes, the test has two parts. First it requires an examination of whether the “worker” is an employee at common law. If a worker is not an employee at common law, he/she could still be an employee under a specific statutory test.
Employee at common law?
Prior to entering into a contract or agreement with an individual, it is important to determine whether the organisation is engaging that person as an employee or 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 courts have established tests to assist parties to determine the true nature of the relationship.
To determine the “true” nature of the labour agreement one has to assess the totality of the relationship between the parties. Over time the courts have identified a number of key factors to determine the status of the relationship as a whole, and no one factor alone is determinative of the relationship.
Key factors that can point to a person being 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.
Conversely, key factors that can point to a person being 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; and
- Regular and ongoing ‘wage’ payments (weekly / fortnightly / monthly).
Whilst these traditional factors are still important, in the recent Federal Court decision of On Call Interpreters and Translators Agency Pty Ltd v CoT (No.3) [2011] FCA 366, the focus shifted to whether the worker performs the work in the course of their own business or in working in the employer’s business.
Ultimately, if it is determined that a person is an employee at common law, that person is an employee under the SGAA (and will be owed superannuation).
The SGAA’s definition of employee
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 the principal.
Section 12 of the SGAA deems certain individuals to be employees for superannuation guarantee purposes.
The 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”.
What is “wholly or principally for labour”?
The words ‘wholly or principally’ are used to limit the types of contracts that are caught.
Therefore, if a contract is partly for labour and partly for something else (eg the supply of goods, materials or hire of plant or machinery), it will qualify only if it is ‘principally’ for labour.
The term ‘labour’ is not limited to physical labour but also includes mental and artistic effort.
What are the implications of this test when it comes to superannuation payments and what does the ATO say?
It is important to remember that contractors (that meet the test set out above) can also be entitled to superannuation.
In 2005, the ATO released a ruling on this issue that outlined the way that it would interpret the SGAA to determine when a person is owed superannuation (even if they are an independent contractor).
According to that ruling (SGR 2005/1) 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); and
(c) the individual is not paid to achieve a result.
Therefore on a strict reading of this ruling, if one of the above characteristics is absent in the relationships, the ATO view should be that the individual will not be owed superannuation. However if an arrangement is reviewed or audited by the ATO, their decision will turn on the evidence available to substantiate any claims being made by the business.
Important note – contracting with companies, trusts and partnerships
The ATO states that if a contractor is a company, trust or partnership, the engagement of that contractor entity or “vehicle” is not, in its view, “for the labour of an individual” and therefore superannuation will not be payable.
Provided there is a genuine contracting relationship on foot (ie the contractor will not in fact be deemed to be a common law employee arising from any arguments of a sham arrangement), if businesses engage companies, trusts and partnerships, the ATO’s view is that superannuation is not payable.
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:
- Whether the organisation is engaging an employee or a contractor at common law.
- 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 (ie an Employment Contract or Independent Contractor Agreement).
- 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 experienced workplace relations and tax lawyers, Moores has significant experience in structuring labour contracts and arrangements. The starting position must always be the “substance” of the relationship, that is, the actual relationship and arrangement between the parties. The terms of the contract are a key element.
Moores has also acted for principals in disputes with the Australian Taxation Office and state authorities in relation to the applicability of PAYG withholding requirements, superannuation obligations, payroll tax and WorkCover obligations. Through this experience we have a strong practical understanding of interpretations and views taken by the Australian Taxation Office and state authorities.
If you would like further advice about your obligations with respect to your workers (whether they are employees or contractors) please contact do not hesitate to contact us.