Superannuation is complicated and it’s not surprising that businesses can get it “super wrong”. Your business could be paying too much super, or too little. Read on to find out more…

We have advised small, medium and large businesses for many years. The two common mistakes that business make about superannuation are:
  1. Overpaying employees because they do not realise that “ordinary times earnings” may not mean all hours worked; and
  2. Failing to pay superannuation for those contractors that must be paid super… and only realising the error when audited by the ATO
“Ordinary Times Earnings” and overpaying super

Many businesses make the mistake of calculating and paying super on all wages.

In fact, employers must only pay super on employees’ “ordinary times earnings” (OTE).

OTE is defined in section 6 of the Superannuation Guarantee (Administration) Act 1992 but its meaning needs some unpacking.

The starting point is that OTE includes “ordinary hours of work”, usually as defined by the employee’s Award or Enterprise Agreement. OTE does not always include overtime beyond the “ordinary hours of work”.

Many wages employees are covered by an Award that states that a full time employee’s work conditions are 38 ordinary hours and that any additional hours are overtime hours.

For that kind of employee, the employer often only has to pay super on the wages paid for ordinary hours, not for overtime hours.

However, overtime hours are OTE if an agreement “removes the distinction between ordinary hours and other hours”. The two clearest examples are:

  1. Salary that is paid for all hours worked; and
  2. Where an employment agreement for a wages employee that requires additional (overtime) hours but omits stating the number of ordinary hours per week.
Some implications for construction businesses are:
  1. Be aware that converting a wages employee to salary can have adverse implications for the amount of additional superannuation to be paid.
  2. For wages employees check your employment contracts to ensure they retain the distinction between ordinary and overtime hours. If they do, check that you’re not incorrectly paying super for overtime hours. If they don’t, consider contacting us to amend your employment contract!
  3. A few Awards provide for a 35 ordinary hour week (not 38). Ensure you know what Awards cover your employees and how many ordinary hours apply.
We have seen situations where businesses have overpaid hundreds of thousands of dollars unnecessarily because they do not understand how super works and how to properly word their employment contracts.

Super for independent contractors

An urban myth is that super only applies to employees.

In fact, your business must pay super to independent contractors that are “deemed employees” under superannuation legislation.

A contractor is a deemed employee” for super purposes if they work “under a contract that is wholly or principally for the labour of the person.”

The ATO regards a contractor as a “deemed employee” where the contractor:

  • is remunerated (either wholly or principally) for their personal labour and skills)
  • performs the contractual work personally (there is no right of delegation); and
  • is not paid to achieve a result.
However a contractor is not a “deemed employee” if the contractor operates through a partnership, company or trust.

For example, your tiling business engages Joe Mackay (trading as Joe’s Tiles ABN 123 456 789) as a subbie to lay tiles at an hourly rate. Your business provides the tiles. There is no signed contractor agreement.

In that scenario your business is probably required to also pay superannuation to Joe Mackay’s super fund, calculated on the hourly rate.

If your business failed to pay super and is audited by the ATO then it may receive a demand for unpaid super. We have seen this issue a number of times.

Some implications for construction businesses are:
  1. Super may be payable if your business engages individuals as contractors.
  2. Whether super is payable may depend on the terms of your contractor agreement as well as what work is done.
  3. If the business does not have well worded contractor agreement, then in many cases there may be no basis to defend an ATO demand for unpaid super.
This article is general information only and cannot cover all that you need to know about superannuation.

We have helped many businesses in the construction industry to avoid “super pitfalls” and reduce their risk, by advising about the superannuation rules and preparing or amending their subcontractor agreements.

If you think your business might have this problem, please contact us to discuss.