Super Guarantee: “Employees” or “Independent Contractors”?

super gurantee

The superannuation guarantee scheme requires all employers to provide a minimum level of superannuation support for their employees, but not for independent contractors. A key area of dispute which can arise between taxpayers and the ATO is whether workers are “employees” or “independent contractors”.

An “employee” for superannuation guarantee purposes includes anyone who is an employee at common law. The relationship between employer and employee is often described as a “contract of service” whereas the relationship between principal and independent contractor is a “contract for services”.

However, defining the contractual relationship between the employer and employee can be a difficult task. The matter of whether a person is an employee is a question of fact to be determined by examining the terms and circumstances of a contract, with regard to the key indicators. No one indicator of itself is determinative of that relationship and the totality of the relationship between the parties must be considered.

It is necessary to look beyond the legal form of the contract to the substance of the arrangement. Parties cannot deem a relationship between themselves to be something that it is not simply by giving it a different label. However, the ATO considers that such a clause may be used to help overcome any ambiguity as to the true nature of the relationship.

The changing nature and diversity of modern work arrangements and practices has made it increasingly necessary for the courts to adopt a broader multi-factorial test to discover the “real substance” of the relationship in question. The courts have also shown an increasing willingness to strike down “disguised employment relationships” that deliberately seek to position a relationship outside of the superannuation guarantee regime and other laws.

The absence of a simple and clear definition explaining the distinction between an employee and an independent contractor is problematic for those seeking to comply with their superannuation guarantee obligations. The ATO has issued Ruling SGR 2005/1 which discusses the various indicators that should be considered in determining whether a person is an employee (“contract of service”) or an independent contractor (“contract for services”). Broadly, this requires consideration of the right to control how, where, when and who is to carry out the work. This is often referred to as the “control test”. While the control test is still an important factor (especially for distinguishing traditional employment relationships), it is not the sole indicator of whether or not a relationship is one of employment. Indeed, the control test is just one of the relevant indicators to be considered.

The modern approach taken by the courts and tribunals to determine whether an employment relationship exists is to consider the “totality of the relationship”. In this multi-factorial approach, the question of whether a person is an employee or an independent contractor may be simply expressed as follows:

  • Is the person performing the work an entrepreneur who owns and operates a business?
  • In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

Similar occupations but different outcomes

The following two cases decided in the Administrative Appeals Tribunal (AAT) demonstrate that different outcomes can be reached despite similar occupations of the workers involved – and that the outcomes of the cases very much depended on the evidence presented before the AAT.

In Trustee for the SR & K Hall Family Trust v FCT [2013] AATA 681, the plumbers were held to be employees and not independent contractors, despite using their own vehicles and tools. The AAT found the plumbers used the taxpayer’s tools for specialised jobs, wore the taxpayer’s logo and did not present themselves as contractors pursuing their own business independent of the taxpayer. In conclusion, it held the taxpayer had failed to discharge the onus of proving that the superannuation guarantee default assessments that the Commissioner had issued to it were excessive.

In XVQY v FCT [2014] AATA 319, the taxpayer was successful in arguing that the plumbers engaged by it were not employees. The AAT took into account the evidence in relation to control, the non-representation of the employer by the worker, the results character (the workers were responsible for satisfactory completion of the jobs), the capacity of the workers to delegate, the assumption of risk by the workers, and the significant ownership of the tools and equipment of the workers. The AAT considered the taxpayer had adequately discharged the onus of proving its case and set aside the Commissioner’s decision.

For taxpayers seeking to argue that workers are independent contractors and not employees, the above cases demonstrate the need to have evidence to address the various factors the courts and tribunals would consider in assessing whether workers are employees or independent contractors.