Wednesday 4 May 2016

Superannuation - just for employees?

Some contractors are entitled to be paid superannuation or their principal will be liable for the superannuation guarantee charge.

On a couple of occasions recently, we have found that this obligation to pay superannuation has been overlooked when a standard template contract has been used to engage a service contractor. 
Template contracts often assume agreements will be reached with a body corporate or that a single one-off service will be provided.  Trouble arises when an individual contractor is engaged for their labour for an extended period of time.

The extended definition of 'employee' in the SGA Act
Sub-section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGA Act), extends the definition of employee beyond the traditional employment relationship to include certain contractors.  The extended definition of 'employee' provides that:

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

The Australian Taxation Office Superannuation Guarantee Ruling (SGR 2005/1) provides guidance as to the operation of this sub-section and indicates that it will extend to contracts for services where an individual contractor is engaged either wholly or principally for their labour.
The approach taken by courts and tribunals has been to consider the following three questions, with reference to the terms of the contract and the conduct of the parties subsequent to the contract:

  • Is the contractor remunerated either wholly or principally for their personal labour or skill?
  • Does the contractor perform the contractual work personally?
  • Is the contractor paid to achieve an outcome or result?

If the answer to the first two questions is 'yes', and the answer to the third question is 'no', the contractor will come within the extended definition of employee in sub-section 12(3) of the SGA Act and the employer will be obliged to pay superannuation contributions on that contractor's behalf.

Cost to employers
If an employer has an obligation to make superannuation payments to a contractor under sub-section 12(3) of the SGA Act and has not done so, the employer will be required to pay to the Australian Taxation Office the applicable Superannuation Guarantee Charge.

What should employers do?
Employers should consider inserting into their template service contract an optional superannuation clause to serve as a reminder to give consideration to this issue before agreeing on amounts payable and finalising the contract. 
Where possible the contract should also include provisions that make it clear that the contractor is able to sub-contract or delegate the work, or payments should be structured so that the contractor is paid for achieving a particular task instead of being paid at hourly rates.
If you are a Victorian public sector employer and would like more information about your obligation to make superannuation payments on behalf of service contractors, please contact:

Jacqueline Parker
Assistant Victorian Government Solicitor
9032 3011

Rosemary Robins
9032 3036

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