The latest from the Federal Court
A recent decision from the Full Court of the Federal Court of Australia has clarified when contractors will be entitled to superannuation under the extended meaning of ‘employee’ for superannuation purposes.
In JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76 the Full Court of the Federal Court decided (at 75) that:
“Whatever the precise language deployed in a contract, it is plain enough that, if a person engaged to perform work has a contractual right to have someone else perform that work, that is a matter which at the very least tends against a conclusion that the person is an employee. The existence of the right is inherently inconsistent with an employee relationship. In the absence of significant countervailing considerations, how can you be an employee if, within the scope of the contract you can lawfully get some else to perform the entirety of your contractual obligations, whether for a short period, or for a longer period.”
In other words, if a right to delegate exists there is no right to superannuation.
Background
JMC provided higher education programs and engaged Harrison on short-term contracts to deliver lectures and mark exams and assignments. Harrison was paid wages but not superannuation on the basis he was an independent contractor. The Commissioner of Taxation (CoT) issued assessments of superannuation on the basis Harrison was an employee.
The CoT argued Harrison was an employee within either the ordinary meaning (s12(1) of the Superannuation Guarantee (Administration) Act 1992, “the Act”) or the extended meaning (s12(3)) on the basis he worked under a contract wholly or principally for labour.
Principles
The Court confirmed the following principles from Construction, forestry, Maritime, Mining and Energy Union v Personnel Contracting[1] and ZG Operations Australia Pty Ltd v Jamsek[2]:
1. Where the parties have committed their relationship to a written contract, the rights and obligations established by the contract are decisive of the character of the relationship;
2. The contract is to be construed in accordance with established principles of contractual interpretation, including having regard to circumstances surrounding the making of the contract where there is ambiguity;
3. The characterisation of the relationship between the parties is not affected by circumstances, facts or occurrences arising between them;
4. The relevant contractual provisions to determine the relationship include, but are not limited to:
a) mode of remuneration;
b) provision and maintenance of equipment;
c) obligation to work;
d) the hours of work;
e) the provision of holidays;
f) deduction of income tax;
g) delegation of work; and
h) the right to exercise direction and control.
5. An employer/employee relationship as opposed to an independent contractor/principal relationship
often hinges on:
a) the extent to which the putative employer has the right to control how, where and when the
putative employee performs the work i.e. contract of service or contract for services; and
b) the extent to which the putative employee can be seen to work in their own business.
6. A label by which the parties choose to describe the relationship is not determinative and the
characterisation is ultimately a matter for the court.
“A contract is not wholly or principally for the labour of the putative employee if the contract is a contract for the provision or production of a result and the putative employee is paid for that result.”
Right to Delegate
Clause 5 of the employment contract provided:
“The Services provider may sub-contract or assign to another person or corporation the provision to the Academy of the teaching services required of him/her by this Agreement but must do so with he written consent of The Academy’s representative.”
In considering the above provision the Court referring to Australian Mutual Provident Society v Chaplin[3] (at 391) held:
“a wholly unlimited right of delegation is “almost conclusive” against the representative being an employee”.
Regarding the necessity to obtain consent, the Court stated, “is primarily directed to the qualifications and quality of the replacement of subcontractor, rather than permitting an almost arbitrary refusal to allow any replacement, no matter how suitable, to provide the teaching services.”
The Court also reached the conclusion the employer lacked the requisite control over Mr Harrison to found an employer/employee relationship and in this regard Mr Harrison:
- had broad leeway over how lessons were provided and was only provided with a lesson guide;
- had to submit the lesson plans and the content of the plans with invoices;
- negotiated when lectures would be provided prior to the timetable being published;
- could have costs deducted if he failed to give a timetabled lecture;
- charged for his services by the provision of invoices and an ABN.
In concluding the Mr Harrison was an independent contractor the Court held (at 106):
“It is true that Mr Harrison could perform the contract personally; but it is equally true that he could have subcontracted or assigned the contract with JMC’s consent. Section 12(3) requires attention to the rights under the contract not to the actual performance of the contract. The contract was one for the provision of teaching services and not principally for the labour of Mr Harrison.”
The decision provides welcome clarity for businesses about the extended definition of ‘employee’ under section12(3) of the Act. Notwithstanding this, it is still critical that businesses correctly distinguish employees from contractors in accordance with the Personnel Contracting decision. If a worker is mis-labelled as a ‘contractor’ for ordinary employment law purposes, they may still be entitled to the superannuation guarantee under section 12(1) of the Act. For this reason, businesses should ensure that their contractor agreements are drafted appropriately and seek legal advice.
Both the High Court and Federal Court continue to refine and clarify the employee/independent contractor question. While contractual nuances will ensure litigation will continue this decision brings welcome stability to an otherwise highly litigated area.
[1] [2022] HCA 1
[2] [2022] HCA 2
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About the Author
Richard Duhig has diverse experience gained across private practice, local government and in-house counsel/senior counsel roles covering areas including commercial, property, town planning, land resumption, intellectual property, insurance and litigation.
Richard is a Senior Associate in our Commercial Law team and specialises in achieving pragmatic, timely outcomes and providing effective, practical advice. With experience from the High Court to QCAT, his philosophy is that while conflict is inevitable, combat is not and with the right commercial arrangements established in a timely fashion, even conflict can be minimised.
Richard’s interest lies in the protection of commercial interests through intellectual property registration and infringement advice, business structuring, shareholder contracts, taxation, insurance, commercial property and leasing arrangements as well as town planning and commercial litigation.
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About the Co-Author
Daniel Dash has over ten (10) years of experience in commercial and corporate law and is a Senior Associate in the Commercial Law team at No Borders Law Group. His areas of focus include contractual disputes, commercial transactions, finance, corporate advisory services and trusts.
His practice areas also include business structuring, shareholder contracts, corporate law, commercial litigation, commercial property, intellectual property, taxation and business succession planning.
Daniel works with company directors and business owners to achieve results that align with client objectives. In all matters, he endeavours to provide practical recommendations and develop clear and effective strategies.
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