The question of whether an individual has been engaged as an employee or as an independent contractor can often have different answers depending on the context in which the question is being asked.

The issues of accrual of leave entitlements, workers compensation obligations, payroll tax, responsibility for PAYG instalments and superannuation all have slightly different tests in determining whether or not the relationship is one of employee/employer or principal/subcontractor.

We often find that businesses are unaware of the fact that many of their subcontractors are actually entitled to super because they are deemed by the law to be an employee for the purposes of super. The test as to whether or not someone is an "employee" for the purposes of superannuation is actually quite straightforward.

Section 12(3) of 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."

Accordingly, if a business contracts with a person who is operating under an Australian Business Number in their own name and that person principally provides the business with their labour (as opposed to goods and/or materials), the business will be liable to make superannuation contributions on behalf of that person.

That is not to say that the person will be deemed to be an employee of the business for all other purposes, however the position in respect of superannuation is clear.

A straightforward way in which a business can help avoid liability for superannuation contributions is to ensure that it engages its subcontractors by a company. That is, the business contracts with a company, with an Australian Business Number that is registered to the company, which in turn employs the person or persons who will be providing services to the business. That way, the obligation to make superannuation contributions lies with the contracting company (which employs the relevant person or persons), rather than the principal contractor.

Overlooking this important distinction at the commencement of the contracting relationship can cost a business thousands in unpaid super contributions. It is typically very difficult and sometimes impossible to retrospectively "fix" the position. As a result, it is critical that a business obtains the right advice before it engages an independent contractor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.