Employers and contracting principals should revisit their superannuation guarantee treatment of sole trader contractors pursuant to the extended definition of "employee" in the JMC decision.
Who falls within the ordinary or extended meaning of "employee" under the Superannuation Guarantee (Administration) Act 1992 (SGA Act) has arisen again, and this time the result should trigger a review of your relationships with independent contractors.
The decision of JMC Pty Ltd v Commissioner of Taxation  FCAFC 76 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 scant reasoning on the application of the extended meaning of "employee" for superannuation guarantee (SG) purposes appears to narrow the obligation to pay SG to independent contractors, but leaves the interpretation and application of the obligation somewhat unsettled and unclear.
JMC engages Mr Harrison
JMC Pty Limited (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.
The Commissioner of Taxation issued superannuation guarantee charge assessments to JMC premised on Mr Harrison being an employee within the meaning of section 12 of the SGA Act either within:
- the ordinary common law meaning of “employee” as provided for by section 12(1); or
- the extended meaning of “employee” provided for by section 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 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 Court held 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 (even though the appeal decision referenced three instances where he had done so). This right would only be discounted if it was 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 Personnel Contracting.
The primary judge 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 and commented that Mr Harrison was required to provide lectures with generally specified content that indicated very limited control as to what was to be covered and only general suggestions as to how that content may be delivered.
The Court rejected the notion contended in the first instance that if Mr Harrison was an independent contractor, he should have 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.
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, but rather this ability was said to be inconsistent with an employer-employee relationship, as an employer does not typically deduct 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.
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 that:
- 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; and
- the way in which Mr Harrison charged for his services (including providing an ABN and invoices) was inconsistent with an employment relationship.
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 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 section 12(3) of the SGA Act, derived from Dental Corporation Pty Ltd v Moffet (2020) 278 FCR 502:
- 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 (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, section 12(3) calls for consideration of the contract itself, not the performance of the contract. 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.
The appeal decision reinforces the primacy of the written contract between the parties in determining whether an individual is an independent contractor or employee, where a comprehensive written contract exists, consistent with the High Court authorities of Jamsek and Personnel Contracting.
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.
Parties should review their independent contractor arrangements and ensure they have comprehensive terms in place that 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 section 12(3) of the SGA Act, towards a more limited obligation to make SG contributions for independent contractors.
Employers and contracting principals should also revisit their SG treatment of sole trader contractors pursuant to the extended definition of "employee".
Employers and contracting principals can expect more developments in relation to SG issues while the Commissioner of Taxation considers seeking special leave, and in the context of the draft guidance and guidelines released by the Commissioner in late 2022.