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Contractors and workers' compensation The importance of knowing who you hire

Contractors and workers' compensation The importance of knowing who you hire

Author: bTa_vantage/Wednesday, August 22, 2012/Categories: Blog

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Many businesses owners will tell you the major challenge of managing people is not necessarily the individuals themselves, but the rules and regulations governing a company's obligations to its staff.

A classic example is the laws governing workers' compensation insurance and superannuation payments for contractors.

If you're nodding your head in agreement, you won't be alone. We've noted a marked increase in audits in this area, with businesses being penalised for misinterpreting their obligations towards sole trader contractors in particular.


Not all contractors are the same

Let's clear up a distinction. In NSW, companies are required to provide superannuation and workers' compensation insurance for their employees. Sole traders, on the other hand, cannot take out their own workers' compensation insurance.

Companies tend to get caught when hiring contractors who may be either sole traders or companies, and therefore differing in their workers' compensation and superannuation requirements. It's a scenario common in industries such as construction.

When you engage a sole trader contractor, they are considered (or must be treated like) employees for both workers' compensation and superannuation purposes, and you are obligated to provide both of these covers in this circumstance.

However if your business engages a contractor who is set up as a company, there is no requirement to provide workers' compensation or superannuation. The exception is where that company is contracted solely to you, in which case you are required to provide these covers.

It's something that catches many companies out, especially when sole traders are hired at short notice or for small jobs. And it can be confusing since workers' compensation is a state-based system, which means it works differently in each state.

Still confused? Here it is in summary:

  • Sole trader contractor: your company needs to provide workers' compensation insurance and superannuation
  • Contractor set up as a company contracting solely to you: your company needs to provide workers' compensation insurance and superannuation
  • Contractor set up as a company (with no exclusivity to you): no need to provide either

Confusing or not, one thing you can be certain of is WorkCover actively audits workers' compensation, and will penalise companies that get it wrong.


Ask for a certificate of currency to avoid the contractor trap

So how do you prevent falling into the sole trader contractor trap?

The key is to keep good payroll records, and stay informed about the contractors you hire by asking for evidence of their workers' compensation insurance. Check they have their own certificate of currency showing proof of workers' compensation coverage, and if so, keep a copy for your records. If a contractor has these documents, you do not need to include them under your coverage unless they are solely contracted to you, and do not service anybody else.

The response from some companies is to steer clear of sole traders to avoid the confusion. We don't necessarily advocate this course of action, however you must be aware of whom you are hiring, and keep your records up to date regarding their circumstances for coverage.

Workers' compensation and superannuation for sole traders is a potential trap for business owners. If you're concerned about your situation, or need more detailed advice in this area specific to your business, please get in touch and we'll walk you through the minefield.

Disclaimer: This information is generic in nature and provided on a discretionary basis only. You must always seek professional advice regarding its applicability to your own circumstance.

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