Superannuation obligations: employees vs contractors
Employers must be able to differentiate between an employee or a contractor in order to meet their superannuation obligations.
While employees work as a part of a business, contractors provide services to a business through their own business. Employers that fail to acknowledge this difference risk being penalised.
Problems generally emerge when a worker is paid as a contractor for a number of years and they are found by the ATO to be an employee. This means they were eligible for superannuation guarantee and other employee rights and entitlements. More often than not, employees will not mention the incorrect treatment until they finish working for the employer.
There are different factors that can help with correctly classifying a worker (see table below).
Employers who make a classification error may get a monetary penalty for failing to meet PAYG withholding requirements and a super guarantee charge for making incorrect superannuation contributions.
They are also liable for backdated PAYG, superannuation guarantee payments and payroll tax.
Employers can refer to the legal definition to reduce the risk of paying penalties and charges. Section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) determines employees to be those who work under a contract that is wholly or principally for the labour of an employer. Whereas, a contractor is defined as a person who is paid to do work of a private nature for less than 30 hours per week.
|Basis of payment||The worker is paid on a time basis.||The worker is paid the amount they quote to complete the work.|
|Provision of equipment||Employers provide workers with the necessary equipment to perform their role in the business.||The worker provides most of the equipment to complete the work.|
|Commercial risk||The business is legally responsible for the work performed by the worker.||The worker is legally responsible for their work. This means they will be required to pay if there is a defect in their work.|
|Ability to sub-contract||The worker cannot pay someone else to do the work.||The worker has the freedom to pay someone else to do the work.|