Workers' Compensation insurance is required to cover the costs incurred by an employee who has been injured at work or while carrying out duties relating to their employment. In the absence of a policy, the employer would have to bear the costs, which they may not be able to afford. This is why the insurance exists: so that employers are not liable to pay, and employees are secure in the knowledge that they would be compensated, if a work injury were to occur. This insurance plays a vital role in employment relations in Australia, and not having this cover is against the law.
Each state has slightly different legislation regarding Workers' Compensation, but essentially, the rules are pretty much the same across Australia. In NSW, Workers Compensation is enforced by WorkCover. All employers in NSW (excluding exempt employers as outlined below) must have a workers' compensation policy.
"An employer is any person or business entity that employs or hires workers on a full time, part time or casual basis, under an oral or written contract of service or training contract. Working directors of a corporation are considered employees of the corporation."
If you are a business owner in Australia and pay more than $7500 including superannuation to employees or "deemed worker" (more on this below), or you employ trainees or apprentices, or you are a member of a group for premium purposes, then you need to have a workers' compensation insurance policy in place for your business, even if you are the only employee in your business. If none of these apply to you, then you are deemed an exempt employer. Even if you are an exempt employer, you still need to ensure that you have a safe work environment for your employees. This falls under duty of care.
Wages can include the following:
salary/wages
overtime, shift and other allowances
over award payments
bonuses, commissions
payments to working directors (including directors' fees)
payments to pieceworkers
payments for sick leave, public holidays and the associated leave loadings
value of any substitutes for cash
employer paid or payable superannuation contributions (including the superannuation guarantee levy)
grossed up value of fringe benefits (allowances subject to fringe benefits tax are counted at the grossed up value, that is the value of the benefit multiplied by the relevant Australian Tax Office fringe benefit formula).
long service leave payments (including lump sum payments instead of long service leave)
termination payments (lump sum payments in respect of annual leave, long service leave, sick leave and related leave loadings)
trust distributions to workers where the distribution is in lieu of wages for work done for the trust.
Wages do not include:
payments to non working directors
compensation payments under the Workers Compensation Act 1987
any GST component in a payment to a worker.
Some business entities pay contractors and subcontractors in addition to, or instead of paying wages. Under certain circumstances, these contractors may be a "deemed worker" even if they have their own ABN.
Deemed Employees
The most common mistake that businesses make when declaring their wages for Workers' Compensation, is understating wages because they do not include certain contractors who would be deemed employees. Schedule 1 of the Workplace Injury Management and Workers Compensation Act 1998, lists the type of workers who are "deemed workers":
workers lent or on hire (i.e. hire of labour)
outworkers (e.g. textile workers performing duties from home)
other contractors (see below)
contractors under labour hire services arrangements (e.g. such as through an employment agency)
rural workers (a person who works at rural premises in an agricultural or pastoral occupation, e.g. fruit picker)
timbergetters
salespersons, canvassers, collectors and others
tributers
mine employees
mines rescue personnel
jockeys and harness racing drivers
drivers of hire-vehicles and hire-vessels (contract of bailment)
caddies and others employed through a club
shearers' cooks and others
fire fighters in fire districts
workers at place of pick-up
boxers, wrestlers, referees and entertainers
voluntary ambulance workers
ministers of religion
ministers of religion covered by policies
participants in training programs
WorkCover can issue a private ruling to an employer to determine whether a person is a deemed worker for the purpose of declaring wages.
Contractors
If you are making a payment to a contractor who operates as an incorporated entity (i.e. a Company, being a separate legal entity) then it is unlikely that they would be treated as a deemed worker. However, the Workers Compensation Commission, the Courts and WorkCover, examine a number of indicators to determine if the contractor is a deemed worker. The following guidelines have been provided by WorkCover.
A contractor is more likely to:
be engaged to carry out a particular task using his or her own skill and judgement
employ others, delegate or sub-let work to another
be paid on the basis of a quotation for the job
supply his or her own tools and materials
carry on an independent business in his or her own name or under a business or firm name.
Please note that an ABN by itself is not a definite indicator of a person(s) status.
A worker is more likely to:
be subject to direction from the employer as to the work to be performed and the time and manner in which it is performed
be required to actually carry out the work
be paid on a time basis
have tools and materials supplied by the employer
work exclusively for a single employer
be affected by PAYG tax arrangements.
A person may have been hired as a contractor and be a contractor for other purposes such as tax, but still be a worker for the purpose of workers compensation. The status of a person for tax purposes bears no direct relationship to that person's status as a worker for workers compensation purposes.
The amounts that an employer pays to deemed workers needs to be declared as wages in their premium calculation, but will not include payments/reimbursements for materials, tools, equipment or plant. E.g. a painter providing painting services on a construction site also provides paint and paint brushes. He is reimbursed for the paint and brushes, and in addition is paid an hourly fee for his services on the building site. Assuming he is a deemed worker, the amounts to show in the employer's wages declaration will only include the hourly pay, but not the reimbursement for paint and brushes.
Costs deducted from remuneration paid to contractors
The Act does not require an employer to include costs necessarily incurred by the contractor in the wages declaration. However, there is no definition of the costs or any process for valuing these costs. In the case where costs were incurred, the employer and the Scheme Agent should consider the estimated amount of "overhead costs" that the contractor would need to incur in order to provide services other than labour. If a reasonable estimate cannot be made, then they may used the standard default percentages provided by WorkCover, as shown below.
For more information about wages definitions and deemed worker, please read the Wages Definition Manual, published by WorkCover NSW.
If you have any questions about Workers Compensation, or how to fill out your insurance forms, please contact us and we will try to assist you.
If you have been selected for a WorkCover audit, we can assist you in the audit as well. Please contact our office as soon as possible.