Preventing wage and superannuation underpayments

In recent years, we have seen an exponential increase in the underpayment of superannuation and the need for corrective action. In our experience, there are typically two reasons for underpayments.

The first is a misapplication or misunderstanding of industrial instruments and incorrect payroll coding based on that error. A common example is where an employer underpays wages because they have misinterpreted the applicable rates under the relevant award. While this might be a small mistake on a per employee or per pay period basis, the error could amount to hundreds of thousands or millions of dollars over time if the employer has a large workforce.

The second is where underpayments arise due to an incorrect classification of their workers as contractors rather than employees and the mistaken belief that contractors are not entitled to superannuation when, in fact, in many cases, contractors are entitled to superannuation. There are also recent court decisions (including CFMMEU & Anor v Personnel Contracting Pty Ltd, ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors, and JMC Pty Ltd v Commissioner of Taxation) that affect our understanding of the relevant tests. 

Underpayments are not a new phenomenon.  Several factors have contributed to an increased presence in the news and heightened attention surrounding this issue:

• recent developments in wage theft legislation have led to employers taking a more active approach to auditing their superannuation compliance;
• non-compliant employers are being identified by the ATO’s data matching systems. These systems sit behind Single Touch Payroll and can automatically match wage entitlements with amounts paid to an employee’s superannuation fund;
• employees and unions are more informed and diligent in checking that workers are receiving their full wage and superannuation entitlements. This is particularly the case after their employment or, for many contractors, when their work arrangement ends;
• penalties for breaching the Fair Work Act have significantly increased which has motivated employers to take more active steps to audit their payroll practices;
• employers and their advisers are more alert to the risk of underpayments and their obligations under the law. While underpayments have never been acceptable, recent examples of employers making mistakes or short-changing their workers have received substantial adverse media and social media attention. This has resulted in employers getting on the front foot to ensure they are compliant with their obligations; and
• the law is constantly evolving, with recent court decisions and changes to the Fair Work Act, meaning that employee and worker entitlements are being talked about regularly. 

Following recent cases, the approach to determining who is an employee or a deemed employee for superannuation purposes has changed.

Superannuation is payable to all employees. However, there is still misunderstanding and misinformation about whether superannuation is payable to contractors.   

Contractors are entitled to superannuation whenever their contract is wholly or principally for their labour. The courts and the ATO now accept that this will be the case where: 

• there is a contract: the contract can be written or verbal;
• the worker is personally engaged and works under the contract: a worker will be caught under this condition even if they are a sole trader who has an ABN. However, if the worker is engaged through their own company, trust or partnership, the engagement is with that entity and not the individual. This is only a general rule. Sometimes, if the worker and their trust, company or partnership are made parties to the contract, the worker might be caught under this condition; and
• the contract is wholly or principally ‘for’ the labour of the worker: what the contract is for must be assessed from the perspective of the business acquiring the services, noting:
  • 'labour' includes mental and artistic effort as well as physical toil;
  • a contract may provide for the provision of labour and still be principally directed toward acquiring a benefit other than the labour (eg the use of certain equipment owned by the worker);
  • if the worker has a genuine right to delegate, subcontract or assign the work to someone else, the contract is not for the labour of the relevant person, even if the consent of the principal is required. In many professional contexts, where a specialist is engaged for their skills and qualifications, the contract will generally require that individual to perform the work; and
  • if the contract is for the provision or production of a specified result or outcome – for example, to build a brick wall or prepare a report on a project – and the fee is payable for the completion of the result or outcome, it is likely that the contract is not for the labour of the worker.  The mode of remuneration (fixed fee, cost-plus, piece rates or hourly rates) can assist with this enquiry. 

Superannuation is a legislated requirement. If superannuation is payable under the law, the principal is still exposed to unpaid superannuation and substantial penalties if they fail to make the required superannuation contributions, regardless of any agreement between the parties that superannuation is not payable.  

To comply with its superannuation obligations, an employer/principal must make the required superannuation contributions into the superannuation fund nominated by the worker by the relevant due date for each quarter. The employer will not have met its superannuation obligations simply by ‘topping up’ a worker’s pay rate to account for superannuation, or agreeing with the worker that the worker will pay for superannuation themselves.