Do I need to be paying superannuation to independent contractors in my medical or allied health practice?
Navigating superannuation obligations as a medical or allied health practice owner can be a challenging task, particularly when it comes to engaging with independent contractors. One of our most frequently asked questions is, “Do I need to pay superannuation for independent contractors?” The superannuation guarantee applies to all employees, whether they be full-time, part-time, or casual. However, there is a common misconception that contractors immediately fall outside this scope. This is particularly prevalent in the medical and allied health industry, where working relationships are generally very separate and differ from traditional employment relationships.
There are some circumstances where although an individual might be a contractor, the entity engaging the contractor may still be obligated to make superannuation contributions. This is because, there are instances where a contractor, even one with an ABN or registered business name, is classified as an employee at law, for superannuation purposes.
Misunderstandings in this area can have serious consequences, including you being liable to pay the unpaid superannuation and/or significant penalties. This article aims to unpack these uncertainties and provide some clarity to help you confidently manage your superannuation obligations.
When will superannuation be payable to contractors in Australia?
The answer is found in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA). This section extends the definition of “employee” for superannuation purposes and states 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.”
This means that regardless of what your services agreement states or whether a practice considers a practitioner to be an independent contractor, the key factors to consider are:
Is there a contract?
Does the person ‘work’ under that contract?
Is the contract wholly or principally ‘for’ the labour of the person?
If an individual works under a contract primarily for their labour, they will likely be considered an employee of the contracting party for superannuation purposes. This makes the practice liable for the payment of the superannuation guarantee to the practitioner.
We will explore these key factors a little further now.
Is there a contract?
For many practices, this is a very definitive and easy answer, which is yes. This may be a written contract or a verbal contract which is evidenced by the parties performing the terms of that contract. Does one party promise to provide labour, in exchange for the other making payment?
Does the person ‘work’ under that contract?
The court in the case of Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek) confirmed that section 12(3) applies only to contracts with natural persons—not companies, trusts, or partnerships. In Jamsek, the court ruled that the contractor who engaged in their capacity as a partner in a partnership, was not an employee entitled to superannuation.
In late December 2024, this principle was enshrined in the ATO Ruling TR 2023/4 ‘Income Tax and Superannuation Guarantee: Who is an Employee’.
A gentle reminder: Medical practices should not instruct contractors to incorporate, or otherwise contract through other structures, solely to bypass superannuation obligations. This could be deemed an avoidance scheme, carrying serious legal consequences.
Is the contract wholly or principally 'for' the labour of the person?
The concept of “wholly or principally” for a person’s labour can be tricky to interpret, but it plays a crucial role in determining whether superannuation obligations apply to a contractor. This is to be determined by reference to the contract terms, making it all the more important to have a well-drafted contract in place.
Key questions to ask in this context are, under the contract:
Can the practitioner do the work themselves OR engage another person to do the work (i.e. is there a right to delegate, subcontract or assign?)?
If a contractor has the freedom to delegate, subcontract or assign work under the contract, the worker will generally not fall within the extended definition of employee. However, it is not as simple as the words appearing in the contract – this right must not be a ‘sham, limited in scope or legally incapable of exercise’.
Is the contract for the provision of a result? And is the practitioner paid for that?
The court also noted that contracts focused on delivering a specific result, rather than labour itself, would likely fall outside the scope of section 12(3). For example, if a contractor is paid for achieving a defined outcome rather than an hourly rate, they are less likely to be considered an employee.
Is the contract principally for a benefit other than their labour (i.e. for the provision of equipment)?
If the contract is for both labour and something else (i.e. equipment), it will be a question of fact as to whether the contract is ‘principally’ for the labour of the practitioner. For example, in Jamsek, the contract extended beyond just labour—it involved the provision of materials (such as trucks and related equipment).
Key Takeaway: The specific facts of each contractor arrangement must be assessed, particularly by reference to the terms of the contract.
What About Other Entitlements?
A common follow-up question is: “If I’m liable to pay superannuation, does that mean I’m also liable for other employment entitlements or payroll tax?”
The answer you probably don’t want to hear, but is true, is that - it depends. Even if an independent contractor is an employee for superannuation purposes under s 12(3) of the SGAA, it doesn’t necessarily mean they will be an employee for other purposes. Superannuation obligations are governed by federal Laws, while payroll tax is administered by state revenue authorities under state-based legislation and therefore, there are different tests to determine liability. This means, it is important for you to assess these separately, or to seek advice specifically related to these legal obligations. You may be interested in our other article here, which provides a deeper look into this.
Penalties for Non-Compliance
Failing to meet your superannuation obligations can result in significant penalties. The Australian Taxation Office (ATO) can recover unpaid superannuation contributions, along with interest and penalties. These liabilities can be applied retrospectively, potentially covering years of unpaid superannuation.
It is hopefully now clearer that determining superannuation obligations isn’t as simple as assuming a contractor is exempt. As you have read, there is much more to consider when assessing whether a contractor is classified as an extended employee for superannuation purposes, and misunderstanding these can lead to costly implications.
We have created a short and easy list below to help you stay compliant!
Practical Steps for Compliance
To protect your practice from potential liabilities, consider the following steps:
Evaluate contractor relationships: Use the ATO’s Superannuation Guarantee Eligibility Decision Tool to assess whether your contractors may be classified as employees for superannuation purposes.
Review contracts and payment structure: Ensure contracts with contractors are updated to clearly define the nature of the relationship and reflect the terms of engagement.
Keep clear records: Maintain thorough documentation of contractor engagements, payment terms, and any relevant communications.
Regular reviews: Periodically review contractor arrangements and agreements to ensure ongoing compliance with super obligations.
Seek professional advice: Consult legal and financial professionals to understand your obligations and ensure your contracts and practices align with legal requirements.
How We Can Help
As legal advisors who are experts in the medical and health industry we specialise in advising practices on their potential liability and creating tailored agreements that manage risk and ensure compliance. We can:
Assess your contractor relationships to advise on whether they are likely to give rise to superannuation and other legal obligations.
Draft or update agreements to better protect your practice.
Provide ongoing advice and updates on legislative changes impacting your obligations.
Avoiding compliance issues starts with understanding your obligations and taking proactive steps to address them. Reach out to us today to safeguard your practice and stay ahead of your legal responsibilities.
Our team has extensive experience in providing advice and insights into best practices to manage your risk as a business owner. We have assisted in many clients, just like you to navigate these issues. To discuss your business, contact our team here, and we will put you in touch with the best professional for your needs.