Do contractors get paid superannuation?

Have the recent superannuation changes got you a little worried? Not sure if you should be paying super to your contractors? We’ve got you covered.

By Kelly+Partners Team  |  15 Oct 2021

When the pandemic shut down the world economy, many Australian workers either lost their jobs or were stood down indefinitely. While it’s true the federal government did quickly announce some temporary financial aid, for many people, these disaster payments didn’t necessarily replace previous incomes.

Soon after, the government announced its decision to allow impacted people early access to their superannuation funds. Not only did this cause concern for many financial advisors, it also highlighted the fact that many Aussie contractors were not being paid correct superannuation. 

Which begs the question, do you have to pay superannuation for contractors?

The gig economy 

These days, there’s more ways to work for someone beyond being an employee. This has, in turn, seen the rise of the gig economy which allows people to work in freelance, temporary or flexible positions. Driven in recent years by the emergence of digital platforms that easily connect contractors and businesses, the gig economy workforce has exploded.

However, as more people look towards the gig economy for autonomy and freedom, this means businesses who use their services need to clarify their terms of engagement. This includes what, if any, benefits or other entitlements they must provide to their workers.

What's a contractor?

The Australian government’s business website uses the following definition:

Contractors run their own business and sell their services to others.

Contractors — sometimes called independent contractors, sub-contractors or subbies — generally use their own processes, tools and methods to complete the work. They usually negotiate their own fees and working arrangements, and can work for more than one client at a time.

Contractors have workplace rights and protections but have different responsibilities relating to insurance, taxation and superannuation.

A contractor works directly with a client and may sometimes hire subcontractors to assist with completing a job, especially if the contract is large or they need specialist services to fulfil the contract. 

What's the difference between a contractor and a subcontractor? 

A subcontractor is hired by the contractor. While technically a contractor themselves, they’re contracted to the main contractor and not the business itself. That subcontractor may be an individual contractor or another business. However, as they haven’t been hired directly by the business, their employment terms or conditions are of no concern to the primary client. 

An example: You hire a contractor to paint your entire office, including having the tiles in the kitchen and bathrooms resprayed. Your painter doesn’t spray tiles so they subcontract this small part of the larger job to a specialist tile sprayer.  

Before commencing work with a contractor, you should have everything in writing and sign a contractor agreement. This ensures all parties have a legally binding contract in place and a clear understanding of their rights and obligations.

What's the difference between a contractor and an employee?

The Australian Tax Office (ATO) defines the difference between an employee and a contractor as:

An employee works in your business and is part of your business. A contractor is running their own business.

The ATO provides a table outlining the six different features used to determine if someone is an employee or a contractor for tax and superannuation purposes.

What are my obligations for contractors and superannuation? 

You may still have to pay Super Guarantee (SG) contributions to your contractor if the contract is mainly for their labour. Back to the ATO for more information around this:

A contract may be considered ‘wholly or principally for labour’ if:

  • you’re paid wholly or principally for your personal labour and skills
  • you perform the contract work personally
  • you’re paid for hours worked, rather than to achieve a result.

For super to apply, the contract must be directly between you and your employer. It can’t be through another person or through a company, trust or partnership.

The ATO has a great tool to help you determine if your worker is an employee or a contractor. 

You need to pay superannuation for contractors if you pay them:

  • under a verbal or written contract that is mainly for their labour (more than half the dollar value of the contract is for their labour)
  • for their personal labour and skills (payment isn't dependent on achieving a specified result)
  • to perform the contract work (work cannot be delegated to someone else).

If you enter into a contract with a company, trust or partnership you do not have to pay super for the person they employ to do the work.

Should I be paying my contractor/s superannuation? 

As well as the ATO, you might want to take a look at the Fair Work website for their definition of a contractor as this varies slightly from the ATO. 

You need to take into consideration all the ATO and Fair Work information about contractors alongside your own individual circumstances. Once you’ve done this, you need to determine why your contractor is being hired to establish if they need to be paid superannuation. 

It’s worth noting you should always state clearly, and in writing, your working relationship with any contractor. From a legal perspective, the fact that they call themselves a contractor or have an ABN isn’t enough. With the ATO continually monitoring contracts and potential employer superannuation requirements, you don’t want to be caught, however innocently, not paying the correct superannuation to contractors. You’ll have to back pay their super, and fines and penalties will apply. You may also find your business falls under greater ATO scrutiny in the future. 

If you have any questions about your superannuation obligations to your contractors, please contact your local Kelly+Partners office and Client Director today. You can also request a call back at a time that suits you.

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