Superannuation & Independent Contractors or Consultants

Do you engage independent contractors or consultants in your business dealings?  If so, have you considered whether compulsory superannuation payments need to be paid to these contractors or consultants?

It is common knowledge that employers are required to provide a prescribed minimum level of superannuation to their employees, pursuant to the Superannuation Guarantee (Administration) Act 1992 (Cth) (“the Act”). What may be surprising is that the definition of employee and employer in the Act extends beyond the layman’s definition of employer and employee.  Particularly, if you directly engage independent contractors/consultants, you should be careful as to the nature of your contract with them, in order to avoid being inadvertently classified as employers.

The Act provides that an employee takes its traditional common law meaning.  However, it expands on this by providing 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”.

Whether a person is an employee (within the traditional common law meaning) will depend upon a wide range of factors, including factors such as control, delegation, risk, use of own tools and equipment etc.  Merely calling a person a “contractor” will not change the true reality of that person’s engagement.  To quote the recent decision of Natalie Newton (trading as Combined Care for the Elderly) and Commissioner of Taxation, “a chicken labelled a turkey is still a chicken.” ([2011] AATA 897 at para 24).  If a person is an employee within the traditional common law meaning, the employer must pay superannuation for the employee.

However, where a traditional employment relationship does not exist, you will still need to consider whether the contract exists “principally for the labour” of the independent contractor/consultant.  “Principally” means “chiefly or mainly”.

The following factors will be relevant:

• Is the independent contractor/consultant being remunerated mainly for their personal labour and skills?  If so, this is evidence that the contract is “wholly or principally for their labour”;
• Does the independent contractor/consultant have a right to delegate work to another person?  If there is no such right (i.e. you want them personally to deliver the services), this will be evidence that the contract is “wholly or principally for their labour”.
• Does the contract require the achievement or delivery of a specified result (i.e. the contract payment is due when, and only when, the given result has been achieved)?  If so, this may be evidence that the contract is not “wholly or principally for their labour”.  Rather, it is a contract principally for the delivery of the given result.

If you engage independent contractors, and you get this wrong, you can find yourself being liable to not only pay the agreed contract price for engaging the independent contractor/consultant, but also an additional amount of superannuation.  If you are in doubt, we recommend that you take legal advice from one of our employment law specialists, and suggest you contact our Client Services Manager to arrange a conference.