An extremely common question we are asked time and time again is ‘is my hire a contractor or an employee for superannuation obligation purpose’.
The answer we give is ‘depends’.
How to decide who is or is not a contractor.
Firstly, the main difference between the two is that:
- An employee works in your business and is part of your business.
- A contractor runs their own business.
You may still need to make super contributions for a contractor who provides an ABN if they work under a contract that is wholly or principally for their labour. In this situation, the contractor is considered an employee for super purposes and you are legally required to make super contributions on their behalf.
If someone is hired by you as an apprentice, labourer or trainee they will always be an employee for tax and superannuation purposes.
If a contract exists with an entity other than the person providing the service – such as a company, trust or partnership, generally, there is no obligation on your behalf for superannuation contributions.
Key factors the ATO consider and you should too.
| Situation | Contractor | Employee |
|---|---|---|
| Ability to sub-contract or delegate Who does the work? | Free to pay someone else to do the work. | Can’t pay someone else to do the work. |
| Basis of payment? How does the business pay the worker? |
| Paid for either:
|
Equipment, tools and other assets ( this is super important) |
| Business provides all or most of the things needed to do the work. or Employee provides all or most of the things needed, but business provides an allowance or refunds with the cost of purchases. |
| Commercial risks Who pays to fix mistakes? | Responsible for fixing mistakes at own expense. | A business is responsible if an employee makes a mistake and pays for the cost of fixing it. |
| Control over the work? | Work can be done in any way provided it is completed to an agreed standard, or to the specific terms in the contract or agreement. | Employee follows any reasonable work requests made by the business. |
| Independence Is the worker seen as part of the business or separate? |
| Seen to be part of the business and not independent from it. |
Common misconceptions
Quite a few employers assume they can consider a worker to be a contractor if the individual:
- Has an active ABN
- Only works for you for a day or two
- the individual prefers to be considered a contractor
- Has signed a contract specifying they are a contractor; this does not override your real employment relationship with them.
As an employer, you are not permitted to decide to treat a worker as a contractor if the work arrangements suggest otherwise. This is very important to remember.
The ATO has provided a handy tool, (Employee/contractor decision tool) you can use to check the assessment of your next hire and if they are an employee or contractor for superannuation obligations.
Note that this is a guide only, and if you are unsure and if you have any questions, we can be reached here.
