Over the last year, the underpayment of wages to Australian workers across a range of industries has gained significant media attention, resulting in a number of high profile Australian companies admitting to underpaying their staff to the tune of millions of dollars over the course of many years.
With the cut off date for the Superannuation Guarantee Amnesty looming (7 September 2020), employers should carefully consider whether they have satisfied their superannuation obligations – particularly in circumstances where potential underpayments have been identified.
Common causes of superannuation non-compliance
The underpayment of wages and resulting unpaid superannuation can arise due to a number of factors, including:
- errors in an employee's contract of employment;
- misapplication of legislative or industrial instrument requirements;
- errors in the classification of a worker (employee versus contractor); and
- payroll system errors.
Key take out: There are some key control measures that employers should look to implement to mitigate the risk of non-compliance, including:
- keeping abreast of any changes to minimum requirements for wage entitlements;
- implementing time recording systems for employees to provide a basis for the business to audit hours worked against wages or salary paid in a period;
- performing annual reviews of template employment contracts to ensure that they are consistent with relevant legislative and award changes;
- reviewing contractor and casual employee arrangements to make sure the nature of the person's engagement, and therefore the parties' rights and obligations are correct;
- performing sampling and matching in the payroll system and general ledger to ensure superannuation obligations are being met.
Who is an 'employee' for superannuation guarantee purposes?
Section 12(8) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) provides that a person who is paid to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills is an employee of the person liable to make the payment.
Always a topical issue, the characterisation of whether a worker is an employee at law, has been considered by the courts in a number of recent cases – two such cases are summarised below.
Key takeout: it is important to review contractor and employee arrangements to make sure the nature of the person's engagement, and therefore the parties' rights and obligations have been correctly characterised.
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  FCAFC 122
The recent Federal Court decision in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  FCAFC 122 also addresses legal issues that arise when determining whether the relationship between parties is that of employer and employee, or principal and independent contractor.
The case involved a tripartite labour hire arrangement in which a construction company required skilled and unskilled labour and outsourced the provision of its labour force to a labour hire company (Personnel). The primary judge, Justice O'Callaghan, held that the relationship between Personnel and its workers was one of principal and contractor.1
Justice O'Callaghan's view was that in characterising a relationship, the importance of control lies as much in the parties' contractual right to exercise it, as in its actual exercise, and the level of independence or control enjoyed by a worker was also of particular relevance. As, in this case, the workers had an ability to reject work offered by Personnel and accept work for others, this was ultimately held to indicate a lack of control on the part of Personnel with respect to its individual workers.
Although the worker in question was provided with tools and equipment and did not operate his own business (both factors that often indicate an employment relationship), they were not integrated into the labour hire business and were not provided with an email address or business cards (indicators of a principal-contractor relationship).
The Construction, Forestry, Maritime, Mining and Energy Union and the worker appealed this decision on the grounds that the primary judge erred in concluding that the worker was not an employee of Personnel. On appeal, Allsop CJ, Jagot and Lee JJ ultimately dismissed the appeal.
FC of T v Scone Race Club Ltd FCAFC 225 and FC of T v Racing Queensland FCAFC 224
In both FC of T v Scone Race Club Ltd  FCAFC 225 and FC of T v Racing Queensland  FCAFC 224, the Full Federal Court held that Scone Race Club and Racing Queensland were employers for tax purposes and liable for superannuation guarantee charges on riding fees paid to jockeys.
In each case, the racing bodies contended that they were not liable to pay superannuation contributions due to the fact that:
- it was the owners or trainers that had engaged the jockeys to ride in the races for reward; and
- the payment of riding fees to the jockeys was made on behalf of the owners, in accordance with industry practice.
However, the Full Federal Court dismissed these claims on the basis that the racing bodies failed to provide sufficient evidence to establish that the owners of the race horses were liable to pay the riding fees (and hence make the requisite superannuation contributions on behalf of the jockeys). Rather, in each case it was found that the racing bodies were the "person[s] liable to make the payment" and were therefore deemed to be the jockeys' employer for superannuation guarantee purposes.
On 3 July 2020, the High Court dismissed the taxpayers' application for special leave against the decisions of the Full Federal Court.
Is superannuation payable on the 'back payment' of underpaid wages?
Superannuation is payable at the requisite rate on an employee's ordinary time earnings (OTE), which includes all salary and wages paid to an employee in relation to their ordinary hours of work. Leave payments that are not paid for actual attendance at work (i.e. annual, long service or personal/carer's leave) are generally seen as a continuation of the employee's ordinary hours of work and also forms part of the employee's OTE for superannuation purposes.
However, employers are not required to pay superannuation on payments that are explicitly referable to overtime or payment for work performed outside of an employee's ordinary hours.
Key take out: in undertaking a review of an employer's payroll to determine whether any underpayment exists, ensure each of the payments and allowances paid to an employee over the relevant period are characterised correctly, to determine whether or not superannuation is payable.
When is an entity liable to pay a superannuation guarantee charge (SGC)?
If an entity fails to pay the required superannuation contributions in respect of any underpaid wages, it may be liable to pay a SGC on those payments (together with penalties and interest in respect of any SGC liability).
An employer's individual superannuation guarantee shortfall for an employee for a quarter is worked out based on multiplying the charge percentage for the employer for the quarter (this is generally 9.5%) by the "...total salary or wages paid by the employer to the employee for the quarter"2 (emphasis added).
This means that a superannuation guarantee shortfall should only arise where the required superannuation is not paid in the same quarter in which the salary or wages are paid (not the quarter in which the employer was originally liable for payment). As a result, where a contribution is made to the employees' respective superannuation fund in the same quarter in which the underpayment is paid (or within 28 days), there should be no superannuation guarantee shortfall in respect of which SGC is payable.
Key take out: it will be important to ensure that each component of the wages paid to employees has been correctly characterised for superannuation purposes in order to avoid a liability to SGC in respect of the underpaid wages.
Other consequences for unpaid superannuation guarantee contributions
Where an entity is required to pay SGC, it must:
- report and rectify the unpaid superannuation payments by lodging an SGC statement as soon as possible; and
- pay the requisite SGC.
There are hefty consequences when an entity fails to pay SGC or lodge its SGC statement by the relevant due date – interest will accrue on the unpaid amount and administrative penalties may also be imposed, including for failure to lodge an SGC statement. The maximum penalty for failing to lodge the SGC statement is 200% of the amount of SGC payable.
The Commissioner of Taxation may also issue a company's directors with director penalty notices in respect of unpaid SGC, making those directors personally liable for the company's failure to pay SGC. Further, employers cannot claim an income tax deduction for any SGC (including interest or penalties) which is ultimately paid.
Key take out: where a review has identified a superannuation guarantee shortfall in relation to wages paid to employees in prior years, businesses should take immediate steps to lodge SGC statements and pay the requisite SGC (including any interest) for each quarter, commencing from the time that the non-compliance occurred.
While there is no time limit on how far the ATO can go back in relation to non-compliance with superannuation guarantee obligations, in our experience, the ATO will generally look at the previous 5 years in determining any superannuation shortfall (being the statutory time period in which an employer is obliged to keep superannuation records).
Superannuation guarantee amnesty
Recently, legislation was passed introducing a 'one-off' amnesty for employers who make a voluntary disclosure of any unpaid superannuation contributions relating to the period from 1 July 1992 to 31 March 2018 (Amnesty).
Under the Amnesty, an employer who makes a voluntary disclosure during the Amnesty period:
- will be able to claim a tax deduction for their SGC liability;
- can receive a remission of the administration fee component of the SGC liability (i.e. $20 per employee per quarter);
- will receive automatic remission of any Part 7 penalties for failure to lodge an SGC statement (e.g. this penalty can be up to 200% of the SGC); and
- can pay the unpaid superannuation directly to their employees' funds, rather than directing the payment via the ATO.
The nominal interest rate (10%) on unpaid amounts will still apply – as the policy is that this amount represents the lost earnings an employee would have derived from their superannuation investment, had it been paid on time.
The Amnesty will expire on 7 September 2020.
Key take out: as the cut-off date for the amnesty is fast approaching, we recommend that employers review their employment contracts, and assess whether the salaries and wages paid are sufficient to satisfy all obligations regarding wage and leave related benefits. We also recommend businesses check internal time recording and payroll processes to mitigate the risks of superannuation non-compliance. Where an underpayment of wages and related superannuation arises, make a disclosure to the ATO as appropriate.
2 SGAA section 19(1).
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.