Are your SME clients meeting their super obligations?

This article was current at the time of publication.

When it comes to the Superannuation Guarantee (SG) a common question arises: how does the law apply to contractors undertaking regular work for a client? Are they considered employees under the Superannuation Guarantee (Administration) Act 1992 (SGAA) for superannuation purposes?

That question was central to a recent ruling by the Administrative Appeals Tribunal (AAT), which overturned a decision by the Commissioner of Taxation that would have required a business to pay superannuation to one of its contractors.

The SGAA currently stipulates that all employers must make superannuation contributions into a complying fund in respect of their eligible employees at least four times a year in accordance with minimum prescribed levels. (Contribution timings will change when Payday Super comes into effect in 2026.) 

Currently the SG rate is 11.5 per cent of an employee’s ordinary times earnings.

The Peter Hatfield case

The Australian Taxation Office (ATO) had previously issued assessment notices to the Gold Coast-based business Peter Hatfield Plumbing over unpaid SG payments to a contractor, who in 2021, contacted the ATO to complain he had not been paid superannuation by the plumbing business for 10 years.

The contractor advised the ATO that he considered himself to be an employee of the plumbing business based on work completed, copies of invoices, card transactions, and past superannuation payments from the business, made in 1996.

Following an ATO audit to ascertain whether the business had met its SG obligations, the regulator advised Peter Hatfield Plumbing that it considered the relationship between the business and the contractor was that of an employer and employee.

The ATO determined that the total amount of superannuation owed by Peter Hatfield Plumbing to the contractor, including SG payments and interest, was $123,521.77.

The trustee for the Peter Hatfield Trust, on behalf of Peter Hatfield Plumbing, applied to the AAT in 2023 to have the ATO’s decision reviewed.

In handing down its determination in late September to set aside the ATO’s decision, the AAT found that the contractor was not an employee of the plumbing company under section 12 (3) of the SGAA. The section states that individuals working under a contract “wholly or principally for the labour of the person” are considered employees.

Contractor vs employee controversy continues

Adam Lambert, a special counsel in workplace relations at KHQ Lawyers, says the question of whether a person performing work is an employee or a contractor has long been a controversial issue.

“There are now different rules in different schemes. So, the Fair Work Act was recently amended to change the way in which we approach that question on whether someone’s an employee or not,” Lambert says.

“That was changed earlier this year. So, there’s [a] different set of rules for superannuation and [a] different set of rules to assessing whether someone’s an employee for income tax purposes and so forth.”

Lambert says previous court cases focused on determining whether an individual was a contractor, or an employee, and examined written contracts to work out the rights and obligations of the parties involved.

This included whether individuals were carrying on their own business as a contractor or performing a contract of service as an employee.

Lambert says the recent changes to the Fair Work Act now go beyond written contracts and consider how work is performed. 

This includes whether a worker is under the control of, and following the direction and instruction from, a business – irrespective of what their contract states. 

However, these recent changes do not affect the SGAA.

In the Peter Hatfield Plumbing case, there was no written contract.

“So, you had to look at the practical reality, which made this one particularly complex,” Lambert says. 

“I think had this working arrangement been documented in a written contract with clear rights and obligations, then it wouldn’t have been as contentious.”

Contractors vs employees: what courts consider

Evidence presented to the AAT showed that the contractor had set his own charge rates and provided his own equipment. It also showed that, while undertaking work for the Peter Hatfield Plumbing business, the contractor was not being engaged daily and sub-contracted to at least three other businesses through his own business.

Lambert says these are among the factors that courts consider as indicative of a contractor relationship.

“Who controls the hours of work? Who controls the manner in which work is performed? If the business is instructing the worker about how to do it and when, that’s indicative of an employment relationship.

“But if the worker is using their own equipment, deciding the best way to do the task, determining largely when it’s done, then that’s indicative of someone running their own business.”

Lambert says other factors include whether a worker is paid based on achieving a result, or remunerated based on hours of work performed?

“If it’s based on hours of work, that will be indicative of an employment relationship. But if they’re paid by achieving a task, that’s indicative of someone performing their own business.”

Did they bring their own tools?

In reaching its decision on the Peter Hatfield Plumbing case, the AAT noted that the contractor’s invoices did not show any claims for tools as an expense, indicating he was using his own tools.

In terms of supervision and control, the AAT found the contractor was in total control of the work he accepted, was not directed at how to complete the task, and was not supervised.

Another aspect considered by the AAT was the contractor’s right to delegate work to others. Both parties agreed that the contractor could delegate work.

“If you don’t have the right to delegate, then that’s indicative that you’re an employee,” Lambert says. 

“That goes to whether you are engaged to perform work or to achieve a result. If you’re paid by outcome as opposed to the number of hours you work, that would not be indicative of an employment relationship.”

The AAT concluded that Peter Hatfield Plumbing had discharged its onus of proving that it was not the employer of the contractor and set aside the ATO’s decision.