Quick Summary for Business Owners
- Australian businesses must pay superannuation guarantee (SG) contributions to independent contractors who are paid mainly for their labour (more than 50% of contract value), where payment is for personal labour and skills rather than specific outcomes, and where the work cannot be delegated.
- Having an ABN doesn’t automatically exempt contractors from super entitlements.
- Sham contracting (misrepresenting employment as contracting) carries severe penalties including back-payments with interest and ATO penalties.
If you are trying to work out super obligations for a contractor, the answer isn’t as simple as you’re hoping. Sometimes yes, sometimes no, and the devil (as always) is in the details. But don’t worry – I’m here to break it down in plain English so you can sleep soundly knowing you’re doing the right thing by your contractors and keeping on the good side of the ATO.
The Quick Answer (For Those in a Rush)
If your contractor is working mainly for their labour and you’re essentially treating them like an employee in all but name, then yes – you’ll likely need to pay super. But if you’re genuinely contracting for a specific outcome or result, then probably not.
Still with me? Good, because there’s a bit to unpack here.
Let’s Start with Definitions (Without the Jargon)
Before we dive deeper, let’s get clear on what we’re actually talking about:
Employee: Someone who works for you under your direction and control. You tell them how, when, and where to do their job. They’re integrated into your business and usually work set hours.
Independent Contractor: Someone who runs their own business and provides services to you. They control how they do the work, use their own tools, and can delegate tasks to others.
Subcontracting through an agency: When you contract with a company or agency, and they send one of their workers to do the job. You’re dealing with the agency, not the individual worker.
When Contractors Become “Employees” for Super Purposes
Here’s where it gets interesting (and where a lot of business owners get caught out). The ATO has specific rules about when independent contractors are actually considered employees for superannuation purposes.
You’ll need to pay super if your contractor ticks all three of these boxes:
- The contract is mainly for their labour – More than half the value of what you’re paying is for their time and skills, not materials or equipment
- You’re paying for their personal labour and skills – The payment isn’t dependent on them achieving a specific result
- They must do the work themselves – They can’t delegate it to someone else
Let me give you a real-world example that might sound familiar:
Case Study: Sarah’s Speech Therapy Practice
Sarah runs a busy speech therapy practice and contracts Emma, a freelance admin assistant, to handle reception duties for 20 hours per week. Emma has an ABN and sends invoices, but she must be there personally to answer calls and greet clients during set hours.
Even though Emma has an ABN and calls herself a contractor, she’s actually an employee for super purposes because:
- The contract is 100% for her labour (no materials or equipment involved)
- She’s paid for her time, not for achieving a specific outcome
- Sarah requires Emma to do the work personally
Result? Sarah needs to pay super contributions for Emma, just like any other employee.
Compare That to This Scenario:
Sarah also contracts Mike’s Maintenance Services to repaint her clinic. Mike (a sole trader) quotes a fixed price for the job and completes it over two weekends.
Even though Mike is a sole trader doing the work himself, he’s a genuine contractor because:
- Sarah is paying for a specific result (freshly painted walls)
- The contract includes both labour and materials
- Mike controls when and how he does the work
Result? No super obligations for Sarah.
The Company/Trust/Partnership Exception
Here’s a handy rule that might save you some headaches: if you contract with a company, trust, or partnership (rather than an individual), you generally don’t have super obligations for the people they send to do the work.
For example, if you hire “ABC Cleaning Services Pty Ltd” and they send John to clean your offices, you don’t need to pay super for John. That’s ABC Cleaning Services’ responsibility for their subcontractors.
Understanding Outsourcing and Subcontracting
Let’s clear up some confusion around these terms, because they often get mixed up.
Outsourcing is when you engage someone outside your business to handle tasks or functions for you. This can take different forms:
Business Outsourcing: Handing over an entire business function to another company. Think hiring a payroll company to handle all your payroll, or a marketing agency to completely manage your social media presence. You’re buying the outcome, not the labour.
Subcontracting: This is actually a type of outsourcing where you bring in someone to work on specific tasks, often alongside your team and sometimes under your direction. This is where you’re more likely to run into super obligations.
The key difference isn’t the label you use – it’s about the level of control and integration.
The Practical Stuff: What You Need to Do
If you determine your contractor is actually an employee for super purposes, here’s your to-do list:
- Pay the Superannuation Guarantee – 12% from 1 July 2025
- Calculate it on the labour component only – Don’t include materials, equipment, or GST
- Offer choice of fund – Give them 28 days to choose their super fund
- Pay quarterly – Don’t wait until year-end
And here’s what doesn’t count: just adding an extra amount to their pay and calling it “super.” You actually need to make contributions to a super fund.
Red Flags That Scream “This is Really an Employee”
Watch out for these warning signs that your “contractor” might actually be an employee for super purposes:
- They work set hours that you dictate
- They use your equipment and work from your premises
- You control how they do their work
- They can’t send someone else to do the job
- They’re paid by the hour rather than for completing a specific task
- They’re integrated into your business operations
- They only work for you (no other clients)
Beware of Sham Contracting
Here’s something that gets businesses into serious hot water: sham contracting. This happens when you tell someone they’re a contractor when they’re actually working as an employee. It’s illegal, and the penalties are severe.
If you’re found to be sham contracting, you could face:
- Back-payment of super contributions with interest
- Penalties from the ATO
- Claims for unpaid employee entitlements
- Significant legal costs
The best protection? Make sure your working arrangements genuinely reflect a contracting relationship, not just the paperwork.
International Workers: What You Need to Know
If you’re working with international contractors or have staff working overseas, there are specific super rules:
International Workers in Australia: You’re still required to pay super guarantee contributions for temporary residents, including backpackers, temporary skilled workers, and international students. The same contractor vs employee rules apply.
Australian Employees Working Overseas: If you send Australian employees to work temporarily overseas, you still need to pay their super contributions in Australia. You may be able to apply for a “certificate of coverage” to avoid paying super in both countries.
Exemptions: Non-resident employees working outside Australia, some foreign executives with specific visas, and workers covered by bilateral super agreements may be exempt.
Getting It Right for NDIS and Allied Health Businesses
If you’re in the NDIS or allied health space, this stuff gets even more important. Common scenarios I see:
- Contracting sessional therapists for specific client work (often genuine contractors)
- Hiring admin support that works set hours (usually employees for super purposes)
- Bringing in locum professionals to cover leave (depends on the specific arrangement)
The reality is that the line between contractor and employee has become more blurred with recent legislative changes.
The Bottom Line
Having an ABN doesn’t automatically make someone a contractor for super purposes. It’s all about the nature of the relationship and how the work is structured.
When you’re genuinely contracting for specific outcomes or results, you’re usually in the clear. But when you’re essentially hiring someone to work as part of your team under your direction, super obligations likely apply – regardless of what you call them.
The key is being honest about the real nature of the working relationship, not just the label you put on it.
Need Help Sorting This Out?
If you’re reading this thinking “I’m not 100% sure about my contractors,” don’t stress. That’s exactly what I’m here for. As someone who’s helped countless businesses navigate these tricky waters (especially in the NDIS and allied health sectors), I can help you figure out where you stand and put proper systems in place.
Get in touch for a chat about your specific situation. Trust me, it’s much better to sort this out proactively than to deal with it during an audit!
Remember: This information is general in nature and doesn’t replace personal advice. Every situation is different, so always get professional advice for your specific circumstances.