Employees are entitled to superannuation payments and workers compensation under their employment. On the other hand, independent contractors are not always covered in the same way and may not receive these entitlements. Generally, an independent contractor would be expected to cover their own superannuation contributions and personal injury insurance, as well as manage their own tax obligations. However, in some cases, a contractor could still be entitled to superannuation and workers’ compensation if they satisfy certain criteria.
|Intention of the parties||The parties intend on creating an employment relationship. This can be shown by the worker providing a Tax File Number (TFN) and signing an employment contract.||The parties intend on the worker being engaged as an independent contractor. This can be shown by the worker providing an Australian Business Number (ABN) and signing an independent contractor agreement.|
|Able to delegate or subcontract work||The worker is required to complete all tasks themselves and cannot delegate tasks to other people.||Can delegate or subcontract services to be performed by another person or entity.|
|Amount of control over how work is performed||The worker performs work under the direction and control of the employer. Employer controls requirements such as hours, work location and how work is done.||Has a high level of control over the work they perform, hours, work location and how they work.|
|Financial responsibility and risk||Bears no financial risk (as this is the responsibility of the employer)||Bears the risk of making a profit or loss on each task. Usually is personally liable for poor work or any injury sustained while performing the task. As such, contractors generally take out their own personal injury insurance policy.|
|Tools and equipment||Tools are provided by the employer, or a tool allowance is provided.||The worker uses their own tools.|
|Hours of work||Generally works set hours (unless they are a casual employee)||Parties agree on what hours to work to complete a specific task|
|Expectation of continuing||Usually has an ongoing expectation of work||Usually engaged for a specific task|
|Tax||Income tax is deducted by the employer||Pays their own tax and GST (if applicable) to the Australian Taxation Office|
|Superannuation||Entitled to at least 9.5% superannuation paid into a nominated superannuation fund||Manages their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions)|
|Leave||Entitled to receive paid leave (such as annual and personal leave) or casual loading in lieu of leave entitlements (for casual employees).||Does not receive paid leave.|
There are certain obligations an employer is expected to fulfil with respect to workers’ compensation. In case a worker suffers an injury on the job, an employer is required to take out workers’ compensation for each worker in order to cover wages while a worker is unfit for work, as well as medical expenses that occur as a result of that injury. The WCRA states that an employer must provide and maintain insurance for each worker, or potentially face a penalty of up to 275 penalty units, or up to $37,908.75.
In a recent employment dispute, IR Advocates assisted a former worker whose work involved installing and repairing air conditioning units and carrying out general electrical work. The client was engaged as a worker under a verbal contract. He was an independent contractor for the purposes of the Independent Contractor Act and his engagement with the principal and was required to make his own superannuation and take out personal injury insurance.
His work involved installing and repairing air conditioning units and electrical work. The employer continually insisted that he was an independent contractor and as such was not entitled to certain benefits and protections such as superannuation and workers’ compensation, contrary to the WCRA and Superannuation Guarantee (Administration) Act. Under s 11 of the WCRA, the client satisfies the definition of a worker as a person who works under a contract and is an employee when assessing PAYG withholding under the Taxation Administration Act 1953. The WCRA does not strictly cover “employees” or “contractors”, but rather uses the terms “workers”, which covers the client. Therefore, the client is covered by the Act and is entitled to compensation for injuries sustained when carrying out his duties at work.
One day while working, the client suffered an injury to his hand, requiring urgent medical attention. He was refused an ambulance, with the employer insisting on driving him to a hospital. The employer did this to avoid issues with his insurance (or lack thereof). This was a clear breach under his obligations as an employer under s 48 of the WRCA which outlines that an employer has the obligation to take out and maintain the appropriate insurance policy for each worker.
A contractor paid mainly for their labour is an employee for superannuation purposes. The Superannuation Guarantee (Administration) Act 1992 (Cth) provides that:
“If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”
Even if the person employed is contracting through an ABN in their own name, the employer is still liable to make superannuation contributions on the worker’s behalf. The minimum amount required to be paid is 9.5% of each worker’s ordinary time earnings.
A worker is still entitled to superannuation if he/she is engaged:
- wholly and principally for his/her labour;
- for his/her personal labour and skills, and not to achieve a result; and
- to perform the contract work personally (that is, he/she is not permitted to delegate or subcontract work to other people. (source: Australian Taxation Office)
The client was engaged to install and repair air conditioning units for the employer’s business. The client worked only for the employer during the period of his engagement on full-time hours (or more). That is, he did not work for any other entities during the relevant period. He carried out specific tasks allocated to him and could not delegate these tasks to another person. He was also paid for his skills and labour based on time worked and not for a result achieved (that is, a quote he provides). Applying the test, K is still entitled to be paid superannuation.
Unpaid superannuation contributions can cost a business thousands of dollars in the long run if the distinction between independent contractor and employee is overlooked. It is very difficult and sometimes impossible to retrospectively “fix” the position. Businesses must proceed with caution and obtain advice when engaging an independent contractor and determining whether or not superannuation is payable.
The ATO has material that provides more guidance on contractors and their superannuation entitlements.
Workers engaged to perform a specific job are deemed to be independent contractors who do not qualify for superannuation. For example, if a flower shop contracts with a painter to help them with renovations in repainting their courtyard, the painter would be an independent contractor not entitled to superannuation. This is because the painter was contracted to achieve a result, to paint the courtyard.
The definition of a worker being “a person who works under a contract and, in relation to the work, is an employee for the purpose of assessment for PAYG withholding under the Taxation Administration Act 1953 (Cth), schedule 1, part 3-5” is the starting point for assessing whether or not someone is entitled to workers’ compensation. The Workers’ Compensation and Rehabilitation Act 2003 further outlines specific inclusions and exclusions to this rule.
Schedule 2, Part 1 of the Act, states that certain individuals are specifically included as a worker:
- Share-farmer if they do not provide farming machinery and receive no more than 1/3 of the farm proceeds
- Salesperson paid entirely or partly by commission
- Labour hire, group training, holding company employees (they are workers of the relevant labour-hire, group training, holding company).
- a contract to obtain services from a company, trust or partnership
- a director of a corporation (where the corporation is the employer)
- a trustee of a trust (where the trust is the employer)
- a partner working for their own partnership (where the partnership is the employer)
- a person who is engaged by the Commonwealth
- a professional sportsperson
- a member of the crew of a fishing ship who receives a share of gross earnings
- a person supplying and using a motor vehicle for tuition
- a person participating in an approved program or work for an unemployment program
- a person has a personal services business determination (PSBD) from the ATO.
When an independent contractor is contracted through an agency, for instance, a labour-hire agency, they are effectively employees of the agency who then on-hires them to a principal client. As they are employed by the agency, not the principal, the agency is responsible for covering the cost of statutory obligations such as superannuation, workers compensation, payroll tax and PAYG deductions.
WorkSafe Queensland publishes a list of high-risk industries with respect to the Workers’ Compensation and Rehabilitation Regulation. These include the:
- Agriculture, forestry and fishing industry
- Mining industry
- Manufacturing industry,
- Construction industry,
- Transport and storage industry;
- Health and community services industry
A list of high-risk industries for workers’ compensation is available on the WorkSafe website.
When a worker is injured at work and the principal has no insurance, the principal could be liable for all medical expenses and unpaid wages as a result of the worker’s injury. The employer could also be liable for common law damages as well as facing up to $37,908.75 in penalties (275 penalty units) for breach of the WCRA for failing to insure workers.
The minimum amount of superannuation an employer must pay is 9.5% of each worker’s ordinary time earnings. For independent contractors, this is calculated on the labour component of the contract. If the values of the labour component of the contract are not detailed, it can be calculated using market values and common industry practices. If the labour portion of the contract cannot be calculated, the reasonable market value of the labour component can be used. In this case, the employee was paid on all hours actually worked (including overtime).
Paying an additional 9.5% on top of wages does not count as a superannuation contribution. The 9.5% minimum superannuation guarantee amount must be paid to the worker’s nominated superannuation fund account each quarter.
We engaged with the client and advocated on his behalf. We corresponded with the employer and requested employment records pursuant to the Fair Work Regulations 2009 in order to ascertain the amount of remuneration he was receiving and whether the correct amount of superannuation and other allowances were paid.
If you need assistance or have any questions about WorkCover protection, contact us today. Stephen Arulogun and his team are well experienced in providing advice and solutions regarding WorkCover entitlements.