Warning: you may be liable to pay your contractors Super
Employee or contractor?
Most employers are aware that before hiring a worker they need to determine whether the worker will be an employee or a contractor.
Whether an arrangement is one of principal and contractor or employer and employee is not always clear cut. The current test is quite vague and requires an analysis of the total relationship between the parties and various factors about how the relationship works in practice.
Determining whether the relationship is one of employment is important because of the different rights and obligations that will apply to the employee or contractor. However, there are some employment-like obligations that apply to some categories of contractor.
Do you need to pay superannuation to your contractors?
Under the Superannuation Guarantee(Administration) Act 1992 (Cth) (Super Legislation), the definition of an ‘employee’ for the purposes of the obligation to pay superannuation, extends to include certain types of contractors.
This includes contractors who work ‘under a contract that is wholly or principally for the labour of a person’. A contract will usually be ‘wholly or principally’ for the labour of the worker engaged (and they will be deemed to be an employee) if:
• the individual is paid (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.
This extended definition of ‘employee’ covers many sole trade workers who operate under Australian Business Numbers (ABNs). For example, tradespeople and labourers that are paid hourly rates of pay in the building and construction industry, as well as contract cleaners, bookkeepers, real estate agents and other occupations where the contractors are paid primarily for their labour.
Do you need to have worker’s compensation policies in place for your contractors?
Queensland employers are required to hold insurance under the Workers’ Compensation and Rehabilitation Act 2003 (Workers’ Comp Act) in relation to their ‘workers’.
Similar to the rules about superannuation, the definition of a ‘worker’ for whom a business must have insurance, includes:
• a contractor that makes a contract with the ‘employer’ for the performance of work that is not incident to a trade or business regularly carried on by the contractor, individually or by way of a partnership; and
• the contractor:
o does not sublet the contract;
o does not employ a worker; or
o employs a worker, but the contractor performs part of the work.
Implications for businesses
Because employers cannot ‘contract out’ of their superannuation and workers’ compensation obligations by making agreements with their workers, it is essential that business owners know whether their contractors are considered to be ‘employees’ within the meaning of the Super Legislation and ‘workers’ under the Workers’ Comp Act.
Businesses that incorrectly assume that because a contractor performs work under an ABN they automatically have no entitlement to superannuation or insurance under the Workers’ Comp Act, are potentially liable for:
• back pay on unpaid superannuation contributions (which could be as far back as 11 years for some contractors);
• payment of the superannuation guarantee charge (a penalty);
• penalties of up to $30,250 per ‘worker’ that is not insured under the Workers’ Comp Act; and
• a claim for breaches of the sham contracting rules of the Fair Work Act 2009 (FW Act), exposing it to damages and penalties of up to $54,000 per breach.
If you require specific advice about whether your contractors have an entitlement under either legislative scheme or are otherwise in doubt about your obligations, please give O’Reilly Workplace Law a call.