Did you know some contractors are entitled to be paid superannuation or their principal will be liable for the superannuation guarantee charge? This has enormous implications for contractors who are engaged for their labour (take note construction, IT and professional services industries), for an extended period of time, often on a regular, weekly or project basis. Is your company on a collision course with the ATO?
The ATO’s Position on Super for Contractors
The 2011 Federal Court case of Commissioner of Taxation v. Newton highlights the complexities of this issue. Here, the Court found against the applicant (Natalie Newton, trading as Combined Care for the Elderly), an aged support business that used workers to provide support services to the elderly. The services provided to them included cooking, cleaning, shopping, showering, dressing and general household duties. The services were not physically or personally provided by Ms Newton’s company, but by contractors who the Applicant called when a client requested assistance.
The services were predominantly provided at the elderly client’s premises, except for shopping. The equipment and materials required to perform the tasks (such as cleaning materials, brooms, vacuum cleaners, and cooking equipment) were generally provided by the client rather than the contractor.
The ATO Commissioner made an assessment of Superannuation Guarantee Charge (“SGC”) for the year ended 30 June 2001 on the basis that Ms Newton’s company had failed to make superannuation contributions for 21 contractors engaged.
In the escalating saga:
- The Applicant lodged an objection against the SGC assessment; then
- The ATO disallowed the objection in full; then
- The ATO objection decision was referred to the Administrative Appeals Tribunal (“AAT”) for review; then
- At the hearing, the AAT decided that there was merit in the Applicant’s original objection, that the workers were not “employees” within the common law meaning under the Superannuation Guarantee (Administration) Act 1992 (Cth) (“SGAA”). It considered it relevant the workers were paid to do work that was entirely “domestic” within a “domestic home situation” and, as such, were excluded from the definition of “employees” for the purposes of the SGAA where they have worked for less than 30 hours per week; then
- The ATO appealed the AAT decision to the Federal Court of Australia, which found the AAT had committed an error of law in its construction; and then, finally
- Ms Newton’s company appealed to the Full Federal Court but the appeal was discontinued. The matter was remitted to the AAT for further consideration and re-determination.
The Federal Court decided the ATO’s assessments were not excessive, subject to some agreed variations. The Court decided that the contractors were employees pursuant to subsection 12(3) (and probably also pursuant to subsection 12(1)) of the SGAA based on:
- The materials and tools were provided by the client;
- The workers were not free to delegate work to others because if the circumstance ever arose that an appointed worker became unavailable to provide agreed services, then the allocation of the work to an alternative contractor/worker was subject to Ms Newton’s approval;
- Although it was argued the contractors/workers were free to carry out work with the permission of the clients, this means nothing more than the actual detailed work to be undertaken in a given assignment would be determined by the client. It has nothing to say about the relationship between the Applicant (who allocated the assignment) and the worker;
- The workers provided services under a ‘Labour Hire Agreement’ (LHA) and the signing of an LHA pointed strongly in favour of a finding that the workers are employees – if not under s12(1) then certainly under s12(3) of the SGAA;
- There is no evidence the workers were obliged to produce a result; the strong indications are that what the Applicant required of the contractors was that they devote to the Applicant their labour during the period of any given assignment. There was never any requirement that they produce any ‘result’ (other than, perhaps, and only inferentially, a satisfied client); and
- Despite the contractual description being that of an independent contractor, that of itself establishes nothing.
What This Means for You
The classification of whether an individual is an “employee” or a “contractor” for superannuation guarantee purposes requires all facts surrounding the particular engagement to be considered. No one indicator is conclusive. But rather, each indicator must be weighed against the totality of the situation. For example, one test is based on whether the contractor is “contracted to achieve a result”. In the ATO’s view, an independent contractor is contracted to achieve a result, whereas an employee is contracted to provide his/her labour which enables the employer to achieve a result. Regarding the tests, or indicators, which can be used to determine this issue, note:
- The classic test regarding whether or not an employment relationship exists is the ‘control test’. Simply put, an employee is one who is under an obligation to obey the orders of his/her employer regarding the manner of the performance of a task. In recognition of a highly skilled workforce, the ATO says that the importance of control lies not so much in its actual exercise but rather in an employer’s retention of a prerogative to direct the employee;
- Ownership is also important. Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. Furthermore, if a partnership has contracted to provide services, then the person who actually does the work is not the employee of the other party to the contract; and
- Thirdly, “risk” also constitutes another test/indicator. Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work and often carries their own insurance and indemnity policies as a result.
The ATO provides a handy tool that can help employers decide whether the work a worker is performing is likely to be considered consistent with an employee or contractor. Helpfully for employers, the web reference advises “Provided your responses accurately reflect the working arrangement, you can rely on the result provided by the tool. This is a record of your genuine attempt to understand your obligations to your worker and would be considered if we review this working arrangement in the future.”
What about an ‘ongoing contractor’ and the 80/20 rule?
The notion of a “dependent” contractor is widely believed to hinge on the application of the 80/20 rule. The ATO busts this myth when it confirms:
“Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.
Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and how a contractor:
- reports their income in their own tax return
- determines if they can claim some business-like deductions.
It’s not a factor a business considers when they work out whether a worker is an employee or contractor”.
Make Sure You’re Covered
Because of the legal complexities associated with this issue, Workplace Wizards suggests that you seek specific advice tailored to your industry and circumstances when employing contractors. Doing so should ensure you are not liable ‘down the track’ for paying costly superannuation to contractors engaged.
The obligation to pay superannuation is commonly missed when standard template contracts are used to engage a service contractor. Companies using such templates get into risky territory when an individual contractor is engaged for their labour, for an extended period of time, as opposed to say a single, one-off, service to be provided. Don’t take that risk. We review existing employment contracts or contractor service agreements or ‘start from scratch by providing up-to-date, concise and effective contracts, which have the strongest legal defensibility available. Contact us at firstname.lastname@example.org or 0458 6444 69 to find out more.