By:
Amber Agustin, Amanda Lyras, Elizabeth Smith, Alexandra Armstrong-Millar and Rachel Hurwitz CLAYTON UTZ
Overview of the issue
The issue as to who falls within the ordinary or extended meaning of “employee” under the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act) has arisen again, and this time, the result of the Full Court of the Federal Court’s decision should trigger a review of business’ relationships with independent contractors.
The decision of JMC Pty Ltd v Cmr of Taxation emphasises the importance of a comprehensive written contract between parties and warns against an overly confined and narrow reading of its terms without proper regard to the broader commercial and practical context in which the agreement was made.
However, the decision’s limited reasoning on the application of the extended meaning of “employee” for superannuation guarantee purposes appears to narrow the obligation to pay the superannuation guarantee to independent contractors but leaves the interpretation and application of the obligation somewhat unsettled and unclear.
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JMC engages Mr Harrison
JMC Pty Ltd (JMC) engaged Mr Harrison on a series of short-term contracts to deliver lectures and mark student exams. While JMC paid Mr Harrison for the work he performed, it did not make any superannuation guarantee contributions on his behalf, on the basis that he was an independent contractor.
Liability for superannuation guarantee — Commissioner of Taxation and the Federal Court
The Commissioner of Taxation issued superannuation guarantee charge assessments to JMC premised on Mr Harrison being an employee within the meaning of s 12 of the SGA Act either within:
- (a)the ordinary common law meaning of “employee” as provided for by s 12(1); or
- (b)the extended meaning of “employee” provided for by s 12(3), namely that Mr Harrison had worked “under a contract that [was] wholly or principally for [his] labour”.
JMC objected to the commissioner’s assessments and continued to maintain that Mr Harrison was an independent contractor.
The judge at first instance in the Federal Court, the primary judge, ruled that Mr Harrison was an employee subject to the control of JMC.
The two key issues on appeal were, whether the primary judge erred in his consideration on the question of control — whether:
- Mr Harrison had a real power to subcontract or assign the performance of the teaching services; and
- JMC had control over how, when and where the teaching services were to be provided.
Could Mr Harrison subcontract to another?
The existence of a right to subcontract was held to be inconsistent with an employment relationship.
The Full Court held that it did not matter that Mr Harrison was required to seek written consent from JMC before he was able to subcontract, nor was it relevant whether he had in fact ever exercised his right to subcontract, noting also that there were three instances where he had in fact exercised this right. The right to subcontract would only be discounted if it were legally incapable of being exercised or if it was a sham.
The court noted there was nothing remarkable about Mr Harrison being required to seek JMC’s consent to subcontract the performance of his services. That consent was required to protect JMC’s legitimate commercial interests to ensure teaching services were to the appropriate standard.
JMC’s control of Mr Harrison
The court also held that the focus of assessing whether an individual is a true independent contractor or employee should be on the terms of the comprehensive written contract and not the performance of them, consistent with the High Court’s decision in Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU) v Personnel Contracting Pty Ltd (Personnel Contracting).
Lesson plans and place and time of lectures
The primary judge had concluded that JMC was empowered to control how Mr Harrison was contracted to provide teaching services, being that he was contractually required to provide lectures in accordance with lesson plans, rendering his work subservient to JMC’s business. The Full Federal Court disagreed with this interpretation, finding the lesson plans to be neither detailed nor proscriptive as they did not dictate how the lesson content was to be conveyed, or mandate the duration, method or content. Rather, the lesson plans were no more than a guide which, on its face, Mr Harrison was free to follow, but which he could also deliver in a different way.
The court rejected the notion contended in the first instance that if Mr Harrison were an independent contractor, he should have the unfettered ability to choose when and where his lectures would take place, as this reasoning disregarded the broader practical context of tertiary education which necessarily involves timetabling of lectures. Mr Harrison was free to provide JMC times for when lectures could be given by him which was open to negotiation. Similarly, the fact that the teaching timetable could not be altered after publication and student enrolment was also considered to be a matter of education provider necessity, as opposed to an indicia of employer power.
JMC’s deduction of lecturer replacement costs
Additionally, the ability of JMC to deduct costs associated with a failure to give a timetabled lecture was not indicative of control exerted by it over Mr Harrison. Rather, this ability was said to be inconsistent with an employer-employee relationship, as an employer does not typically deduct the costs of engaging a replacement from payments to an employed teacher.
The requirement that Mr Harrison repeat teaching services without additional payment was found to be directed to ensuring that quality standards in the contract were met, rather than exerting a level of control about when or where services were to be provided.
Mode of remuneration and other matters
The court also considered a raft of other matters and disagreed with the primary judge about the interpretation of a number of terms of the contracts between the parties, including the following:
- The mode of Mr Harrison’s remuneration (being payment of an hourly rate, rather than a fee to produce a result or product) did not point strongly to either an independent contracting relationship or an employment relationship.
- The fact that intellectual property brought into existence by Mr Harrison vested in JMC was deemed to be neutral or to perhaps slightly favour an independent contracting relationship in circumstances where express retention of intellectual property rights is needed to a greater extent for independent contractors than employees.
- The way in which Mr Harrison charged for his services (including providing an ABN and invoices) was inconsistent with an employment relationship.
- JMC’s right to deduct costs if Mr Harrison failed to give a lecture or withhold payment if his services were incomplete or inadequate favoured characterisation as an independent contractor rather than an employee.
- Mr Harrison was held out on JMC’s website and promotional material as being one of JMC’s lecturers. The appeal decision considered that contractors could be expected to hold a number of roles in addition to being engaged by JMC and operating their own businesses outside of their work for JMC. The court linked this point to the right to subcontract, noting that such a right was likely of commercial value to Mr Harrison as he could take higher-paying freelance opportunities and the teaching services were not provided on a full-time basis.
Extended definition of “employee” for superannuation guarantee purposes
The court’s reasons supporting the finding that Mr Harrison was not an employee under the extended definition in the SGA Act were brief and followed from the conclusions reached on the ordinary meaning above.
The court did not dispute the primary judge’s summary of the elements of s 12(3) of the SGA Act, derived from Dental Corp Pty Ltd v Moffet (Moffet) that:
- there must be a contract;
- the contract must be wholly or principally “for” the labour of the person; and
- the person must work under the contract.
The decision turned on whether the third limb of the Moffet test was met. The court considered that this element was not satisfied as Mr Harrison’s right to subcontract (but only with JMC’s consent) indicated that Mr Harrison was not required to personally provide the work under the contract. The Full Court then concluded that, as with the common law characterisation, s 12(3) calls for consideration of the contract itself, not the performance of the contract. The court seemingly adopted the same approach to the significance of a right to delegate subject to consent in the context of the employment or contractor characterisation and applied that same approach to the interpretation of s 12(3) of the SGA Act. The significance of the right to delegate is arguably different in the context of an inquiry into the application of s 12(3) of the SGA Act. In this context, the inquiry is into whether the person “works under a contract that is wholly or principally for the labour of the person”.
It is reasonable to assume that the same test is to be applied to the right to delegate, at least for now.
The court then concluded that the contract was for the provision of teaching services, and not for labour. The court’s reasoning on this issue was strikingly brief.
Conclusions and key takeaways
The appeal decision reinforces the principles delineated in the latest High Court authorities of ZG Operations Australia Pty Ltd v Jamsek and Personnel Contracting. The contract remains king in determining whether an individual is an independent contractor or employee in circumstances where a comprehensive written contract exists, and the terms of that agreement do not amount to a sham.
Central to the decision was that, overall, the contract did not provide the sort of controls over how, when or where Mr Harrison was required to deliver the lectures that would amount to indicia of an employment relationship, including having regard to the commercial and practical context in which the contract was made.
Businesses should review their agreements and ensure the terms are comprehensive and give voice to the indicia of a true independent contracting relationship.
With respect to the extended definition of “employee”, this decision may be viewed by many employers and organisations as a shift away from the orthodox view of s 12(3) of the SGA Act, towards a more limited obligation to make superannuation guarantee contributions for independent contractors.
Employers and contracting principals should also revisit their superannuation treatment of sole trader contractors pursuant to the extended definition of “employee”.
Employers and contracting principals can expect more developments in relation to superannuation issues, as we understand the Commissioner of Taxation has decided to seek special leave to appeal the matter to the High Court. This decision also follows draft guidance and guidelines released by the Commissioner in late 2022, which are yet to be revisited.