According to ATO data, over 92 percent of superannuation entitlements are paid correctly. But what about the other 8 percent?
Small and medium-sized business owners want to get their superannuation obligations right. However, the complex legislative framework surrounding the superannuation guarantee can make it difficult to understand who is, and who is not, eligible to be paid superannuation.
If an employer does not pay super to someone who is entitled to receive it, this may result in penalties and interest charges from the ATO (that are not tax deductible), or even personal liability for directors.
Accordingly, understanding who qualifies for superannuation guarantee contributions is essential for successful compliance, and also for protecting your business.
1. Superannuation Guarantee (Administration) Act 1992 (Cth)
Superannuation contributions are payable pursuant to the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA).
In particular, superannuation is payable by employers in respect of their 'employees'.
However, for the purposes of the SGAA the term 'employee' has both its ordinary meaning and a number of expanded meanings. We have considered what type of persons come within either the ordinary and expanded meaning of the term 'employee', who are then entitled to superannuation guarantee contributions, below.
2. Employees
Ordinary Employees
If someone works for you in a standard employment relationship, whether it is full-time, part-time, casual, or seasonal, or even apprentices and trainees, they are almost always entitled to superannuation guarantee contributions.
This applies (in almost all situations) regardless of:
- how much the relevant employee earns;
- how many hours they work; or
- whether they are employed on a permanent or temporary basis.
Part-time employees under 18
For employees who are under the age of 18, superannuation guarantee contributions are not required to be made in respect of payments to them if they do not work more than 30 hours per week.
This applies regardless of their hourly rate of pay and must be determined on a per week basis (i.e. hours for underage employees cannot be averaged over multiple weeks to come within the part-time exemption).
Domestic or private employees
For employees who are paid to do work wholly or principally of a domestic or private nature, superannuation guarantee contributions are not required to be made in respect of payments to them if they do not work more than 30 hours per week.
Examples of domestic and private work include cooking, cleaning, shopping, bathing, dressing, child-minding, home repairs or maintenance (e.g. gardening).
This exemption only applies in respect of arrangements between the householder and the worker (Commissioner of Taxation v Newton[2010] FCA 1440 (Newton)). In other words, it serves to remove the burden of superannuation guarantee obligations from arrangements entered into by householders for assistance with their domestic or private duties for not more than 30 hours per week, e.g. engaging a babysitter.
This exemption does not include circumstances where the work is done by a worker employed by a third party, in consideration of a fee paid by a householder to the third party, e.g. a business that pays a worker to perform work of a domestic or private nature for an end-user or client (Newton).
3. Volunteers or Unpaid Work Experience Workers
Superannuation is calculated in respect of any 'ordinary time earnings' paid to an employee.
Accordingly, in a volunteer arrangement, where a person lawfully works without receiving payment, there are no earnings in respect of which superannuation would be payable.
Similarly, for work experience arrangements that are lawfully unpaid, there is no obligation in respect of making superannuation guarantee contributions
4. Executives/Directors
A person who is paid to perform duties for an organisation as a member of the executive body of that organisation forms part of the expanded meaning of an 'employee', and is entitled to superannuation.
For an organisation that is a company, this could refer to the company's directors/board members. For an organisation that is an incorporated association, this could refer to the association's committee members.
For completeness, a partnership is not a separate organisation to the relevant partners, accordingly, a partner cannot be an 'employee' of the partnership to which it is a part.
5. Performers
A sportsperson, artist or entertainer paid to perform, present or participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity falls within the expanded meaning of 'employee' under the SGAA, and is entitled to the superannuation guarantee (except if engaged as an independent contractor, see discussion below).
This also extends to include persons paid to provide services in connection with any performance, presentation or participation in these activities, including film making, television, and radio.
6. Independent Contractors
As outlined above, under the SGAA, the term 'employee' takes its ordinary meaning. However, the SGAA also includes several expanded meanings of the term 'employee'. Relevantly, the expanded meaning of the term 'employee' includes a person who works under a contract that is wholly or principally for the labour of the person.
Contractors within the ordinary meaning of 'employee'
Whether certain independent contractors fall within either the ordinary meaning of the term 'employee' or the expanded meaning as a person working under a contract 'wholly or principally for labour' has been subject to interpretation by the Courts.
The Courts have historically applied a multifactorial assessment of the ordinary meaning of the term 'employee' by looking at the 'totality of the relationship' between the parties, not merely the contractual terms agreed between them (Hollis v Vabu Pty Ltd(2001) 207 CLR 21; Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16).
The key factors established by the Courts overtime may be shortly summarised as follows:
(a) Control
An employee generally has less control over how, when and where the work is completed.
A contractor has more freedom to decide these aspects of the job, as they are focused on delivering a result.
(b) Integration
An employee typically works in the business and forms part of and represents the business.
A contractor may provide work for the business but operates their own separate business that they represent/advertise themselves.
(c) Mode of remuneration
Employees are often paid for time worked, this could be hourly, weekly, etc.
Contractors are generally paid for achieving specific results.
(d) Ability to subcontract or delegate
Employees typically perform the work themselves and would not have a contractual clause permitting them to delegate or subcontract their work to a third-party.
Contractors may have the right to delegate or subcontract their work to third-parties.
(e) Provision of tools and equipment
Employees typically have most tools, equipment and other assets required to complete their work provided to them by their employer. If an employee provides their own tools, an employer generally provides them with an allowance or reimburses them for expenses incurred.
A contractor would ordinarily provide all or most of the equipment, tools and other assets required to complete their work and the business would not likely give them an allowance or reimbursement for the expenses incurred.
(f) Risk
An employee bears little or no risk in respect of the work they complete in their employer's enterprise.
A contractor that operates their own business bears the commercial risks for their work, which may include being responsible for fixing defects.
However, the relatively recent High Court judgments in CFMMEU v Personnel Contracting [2022] HCA 1 (Personal Contracting) and ZG Operations v Jamsek [2022] HCA 2 (Jamsek) confirmed that (for superannuation purposes), whilst the multifactorial approach outlined above may be relevant, where the rights and duties of the parties are comprehensively committed in a written contract, the legal rights and obligations established by the contract are decisive of the character of the relationship, provided that the validity of the contract has not been challenged as a shame, or that the terms of the contract have not been varied, waived or are subject to an estopped.
In order to ascertain the relevant legal rights and obligations, the contract must be construed in accordance with the established principles of contractual interpretation. In that respect, regard may be had to the circumstances surrounding the making of the contract, as well as to events and circumstances external to the contract which are objective, known to the parties at the time of contracting and which assist in identifying the purpose or object of the contract. Relevantly, the contractual provisions that may be relevant in determining the nature of the relationship include, but are not limited to, those that deal with the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work, the provision for holidays, the delegation of work and the right to exercise direction and control (Personal Contracting; Jamsek).
The characterisation of a relationship as being either one of employer and employee, or one involving the engagement of an independent contractor, is ultimately an evaluative judgment that takes into account the totality of the parties’ contractual rights and obligations. Unfortunately, this evaluation is rarely straightforward, and some degree of uncertainty may be unavoidable.
Accordingly, where you are unsure about the ordinary meaning of the term 'employee' and whether a contractor may fall within this meaning, we recommend that you seek appropriate legal advice in respect of this classification.
Contractors within the expanded meaning of 'employee'
Where a contractual arrangement may not fall within the ordinary meaning of the term 'employee', it is possible that a contracting arrangement may instead fall within the expanded meaning of the term 'employee' as a person who 'works under a contract that is wholly or principally for the labour of the person'.
The purpose of this expanded definition is capture independent contractors who principally provide their personal labour and skills, as opposed to being principally engaged to provide materials/plant and equipment or certain outcomes.
Three elements must be satisfied before a person could be said to be an employee within the extended meaning:
- there must be a contract;
- the contract must be wholly or principally for the labour of the person; and
- the person must work under the contract (Dental Corporation Pty Ltd v Moffet(2020) 278 FCR 502).
In this respect it is important to note, 'labour' includes mental and artistic efforts, as well as physical.
Some contracts may be wholly or principally for the labour of the individual contracted even though the individual is not an 'employee' within the ordinary meaning of that term.
Accordingly, even where there is no common law employment relationship, where you are unsure as to whether a contractor may fall within this extended meaning, we recommend that you seek appropriate legal advice in respect of this classification.
