Employment Law – Payment of superannuation to contractors
A recent judgment by the Federal Court of Australia has highlighted some of the common misconceptions many businesses work under when engaging independent contractors, especially when it comes to payment (or non-payment) of superannuation contributions.
JMC Pty Limited v Commissioner of Taxation [2022] FCA 750 (JMC)
The background
Business “A” had engaged a sound engineer, Mr Harrison, to deliver lectures to its students and to mark student examinations or assignments. He was paid an hourly rate, submitted invoices, timesheets and weekly lesson plans, was not required to provide any of his own equipment, and ceded to Business A any intellectual property rights in any material arising from his teaching services.
Business A also had a degree of oversight and control over Mr Harrison including when, how and where he was to provide the teaching services. Under the agreement, Mr Harrison could not sub-contract or assign the teaching services.
Business A had not made any superannuation contributions in respect of Mr Harrison.
The Decision
The issue in this decision was whether Mr Harrison was deemed an employee under both the common law meaning of “employee” and the extended meaning of “employee” in section 12(3) of the Superannuation Guarantee (Administration) Act 1992.
The Federal Court held that Mr Harrison fell within both meanings of employee.
The courts typically assess whether or not a worker falls under the definition of an employee under general law based on factors such as terms of the contract, nature of the contracting parties, the existence of a right of control, the right to delegate work, manner of remuneration, provision of equipment, ability to perform work for others and assumption of risk.
However, even if a person is found to be a contractor under the general law, the trap many businesses fall into is not considering the extended meaning of employee, particularly when it comes to superannuation.
If a person works under a contract that is wholly or principally for the labour of the person, that person will be regarded as an “employee” for the purposes of the SGA Act.
In other words, a business will have an obligation in relation to superannuation even if a person is intended to be, or is in fact for other purposes, a contractor.
For a person to be an employee within the extended meaning, there must be a contract, the contract must be wholly or principally for the labour of the person and the person must work under the contract.
A contract is not wholly or principally for the labour of the individual if the contract is a contract for the provision or production of a result and that individual is paid for that result.
In recent times the Commissioner of Taxation has taken active steps to inform independent contractors of their potential entitlements to superannuation and taken action against businesses who may not have paid superannuation for independent contractors.
And the penalties for failing to pay superannuation entitlements can be up to two times the sum of the superannuation not paid, interest at 10% on that shortfall, and a small administrative fee.
Lessons for employers
Businesses should go back and have a look at their contractors to determine whether any superannuation is due, particularly under the extended definition of “employee”. If there is any potential liability, voluntary disclosure to the Commissioner is recommended as a way of mitigating penalties.
For more information and expert advice, ask to speak to a lawyer at Ezra Legal on (08) 8231 6100 or email reception@ezralegal.com.au
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Julian Roffe
Practice Manager
Ezra Legal
