If you run a business, then the difference between engaging an employee and an independent contractor is a crucial matter - because if you engage a contractor there will be no obligation to pay annual leave or sick leave, and generally, no obligation to pay superannuation.

However, crucially, many independent contractors are legally entitled to superannuation guarantee (SG) contributions.

Furthermore, the ATO catches thousands of businesses by surprise every year on this matter of whether you are engaging an employee or a contractor – and as the gig economy expands and traditional workplace structures shift, this area is becoming even more important.

Much of the confusion here stems from the fundamental gap between common law definitions of “employee” and the application of the relevant superannuation and tax legislation.

Specifically, while a worker might be a contractor for employment law purposes, the super law expands the definition of an “employee” for superannuation purposes to include a worker who is engaged under a contract that is “wholly or principally for the labour of the person,”

And to determine if a contract is “principally for labour,” the ATO and the courts look at the core reality of the arrangement, rather than the title on the contract.

In this regard, a contract is generally considered to be for labour if the individual is paid to provide their personal skills and physical effort and is paid for their hours worked rather than a fixed result – and if they cannot delegate or subcontract the work to someone else.

The stakes for businesses are remarkably high as the ATO does not view the non-payment of contractor superannuation as a simple administrative oversight. It is treated as a significant breach of the relevant legislation.

And with the ATO recently issuing a reminder to employers who engage independent contractors that they generally need to pay super for them if they engage them mainly for their labour, personal effort, skills or time – it’s important to get this right.

Reminder

So, please make an appointment to see us if you run a business or are considering starting one - as it will be necessary to determine if you are liable for superannuation for anyone you may engage in that business.