Employment and Migration Blog

Contractors vs Employees: who do I need to pay superannuation to?

Posted by Stephen Booth on 26 Nov 2018

As an employer, one of the most important factors to keep in mind with regard to the engagement of contractors is ensuring that you get the on-costs right.  The rules for superannuation, payroll tax and workers compensation are complicated, not only due to the general uncertainty surrounding the tests used to classify workers as either employees or contractors, or the grab bag of considerations to be taken into account, but also thanks to the fact that legislation in each area prescribes different exceptions or extensions to those rules.

With regard to superannuation, it is common to see situations where an individual has been engaged as a contractor, and the principal has made the assumption that as it is not an employment relationship, superannuation is not payable.  This is not always correct.

Superannuation legislation extends the definition of an 'employee' to cover a person who works under a contract either "wholly or principally for the labour of the person".  A worker will fit within this test and be classed as an employee (for whom superannuation is payable), even if both parties treat the connection as a contracting relationship, where the individual is renumerated for their personal labour and skills, must perform the contractual work personally (i.e. the worker has no right of delegation), and is not paid to achieve a 'result'.

Within the context of a 'results' contract, the worker is likely to be paid a fixed amount for a task (as opposed to receiving compensation through an hourly, or time-based rate of pay), is required to produce a specific result, and in turn bears the risk of rectification or rework.  It therefore follows that a contractor who is both engaged on a regular open-ended basis and paid by the hour is unlikely to be on a 'results' contract - meaning that superannuation will be payable.

The situation is different if the contracting party is an external company responsible for supplying the services of an individual (e.g. a recruitment agency), as under this circumstance it would be the contracting/employing company that has the obligation to pay the worker's superannuation.

So, when engaging an individual as a contractor, it is important for employers to put careful consideration towards any potential liabilities surrounding superannuation, and if necessary, to factor any relevant superannuation remittances into the payments being made to the contractor.  
By doing so, employers can ensure that they forego any nasty surprises by way of liability for superannuation, interest and/or possible penalties when the relationship sours or comes to an end.

For further information relating to the classification of workers as either employees or contractors, please see Coleman Greig's Plain English Guide to Employee or Contractor.

If you have a query relating to any of the information in this article, or you would like to speak with an experienced employment lawyer with regard to contracting relationships and/or on-costs, please get in touch with Coleman Greig's Employment Law team today: