Generally speaking, businesses pay superannuation contributions to employees, not contractors.

If you use contractors in your business, you might assume you don’t need to worry about superannuation. However, applicable legislation, precedent cases and Australian Taxation Office guidance make clear that some contractors are deemed “employees” for superannuation purposes.

The determination that must be made is whether you are engaging contractors for their labour (i.e. their personal time, skills and expertise), or for some other primary purpose (e.g. for the provision of equipment). If you get this wrong, you could be liable for unpaid superannuation charges, penalties, and interest.

What you need to know

S12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) stipulates that if someone is working for you principally using their own labour and skills, they may be treated as an employee for superannuation purposes, regardless of what your contract with them says.

As noted by the Full Federal Court in Dental Corporation Pty Ltd v Moffet (2020), for subsection 12(3) of the Act to apply, all three of the following criteria must be satisfied:

  • there must be a contract;
  • the person must work under that contract;
  • the contract must be wholly or principally ‘for’ the labour of a person.

The more difficult assessment lies in determining the purpose of the contract element. When you engage a contractor, check the following:

  • Does the contract contain a right to delegate, subcontract or assign the work?
  • Is the contract for the provision or production of a result, and is the worker paid for that result?
  • Am I paying for this person’s work and expertise, or am I paying for a specific result that any capable business could deliver?

Your contractor arrangement is higher risk if:

  • The contract doesn’t give the contractor a genuine right to delegate or subcontract;
  • Contractor payment is not dependent on delivering a specific result (for example, payment is based on time worked);
  • You are paying for their personal skills or expertise, such as a consultant, designer, trainer, or specialist.

The risk is lower if:

  • The contractor has a genuine right to subcontract the work to others;
  • Payment is tied to results (for example, the completion of specific tasks);
  • The contract is principally for a benefit other than the labour of the worker (for example, the contract is principally for the provision of equipment).

Case law study

In Dental Corporation Pty Ltd v Moffet (2020), a dental company engaged a dentist as an independent contractor after buying his practice. He invoiced the company for his services, managed his own tax affairs, and the contract specifically stipulated that he was responsible for his own superannuation. The Federal Court nonetheless ruled that the dental company owed him superannuation, because it was paying for his personal skills as a dentist. Thus, even a well-drafted contractor agreement won’t negate liability to pay superannuation if the substance of the arrangement is really about the person’s own labour.

What you can do to reduce your liability

While you can’t simply contract your way out of this, a well-structured engagement with contractors will help. Ways to avoid situations requiring payment of contractors’ superannuation entitlements include:

  • A genuine right to delegate or subcontract
  • Focus on fixed deliverables and outcomes, not ongoing duties
  • Don’t control how the work is done, just what needs to be delivered.

It is a good practice to regularly review your business’ contractor arrangements, especially where the same person has been personally performing the same work or duties for months or even years.

If any doubt exists over whether you are required to pay superannuation entitlements to your contractors, it is imperative to seek advice from a qualified legal professional – and to do so before your existing contractor arrangements become a liability.

Yuanchao Chen
Lawyer