When is a contractor an “employee” for superannuation guarantee purposes?

As discussed under Part 2 of this super guarantee article series, under the super guarantee system, super contributions must be made on behalf of “employees” as that term is defined under the Superannuation Guarantee (Administration) Act 1992 (SG Act).

Importantly, there are two definitions of employees under the SG Act which could potentially apply to contractors:

• The “ordinary” definition of employee under section 12(1) (ie, common law employees); and

• The “expanded” definition of employee under section 12(3), which is defined as a person who works under a contract that is wholly or principally for their labour.

In some circumstances, a person will fail to meet the definition of a common law employee, but will still be an “employee” for super guarantee purposes because they are caught under the section 12(3) expanded definition (sometimes referred to as “deemed employees”). This is particularly relevant for contractors.

ATO view on the expanded definition under section 12(3)

The ATO set out its interpretation of section 12(3) of the SG Act in Super Guarantee Ruling 2005/1 (SGR 2005/1), though we note that SGR 2005/1 is currently being reviewed following two recent High Court decisions (discussed in Part 2).

The ATO note at paragraph 78 of SGR 2005/1 as follows:

Where the terms of the contract in light of the subsequent conduct of the parties indicate that:

• The individual is remunerated (either wholly or principally) for their personal labour and skills;

• The individual must perform the contractual work personally (there is no right of delegation); and

• The individual is not paid to achieve a result,

The contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under subsection 12(3).

Cases on the application of section 12(1) and 12(3) to contractors

Since the decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet), discussed in detail here, a number of cases in the Federal Court and Administrative Appeals Tribunal (AAT) have considered the application of section 12(1) and 12(3) of the SG Act to contractors. These cases are set out below.

Sessional music teacher found to be employee for SG purposes

In the decision of Olias Pty Ltd as trustee for the Storer Family Trust and Commissioner of Taxation [2021] AATA 1524 (Olias), the AAT found that a “contract” music teacher fell within the ordinary definition of ‘employee’, and was therefore an employee for the purposes of the SG Act.

Here, a music school, that was run through a discretionary trust, provided music lessons to children, including private tuition for students. Private lessons were provided on a term basis, and weekly time slots were reserved exclusively for individual students.

The music school engaged an individual as a “contractor” to provide private lessons for guitar and singing to students. The music school’s position was that it engaged the individual as an independent contract, not as an employee.

The AAT found that the individual was a common law employee. Some factors indicating an employment relationship were:

• There was no written contract between the parties, but the contractual arrangement between them was akin to that of a casual employment agreement;

• There was no negotiation in relation to pay, and the individual was refused a pay increase when he tried to renegotiate one;

• The music school had a large degree of control over the individual in relation to the duration and location of lessons, the fees paid for lessons and the uniform to be worn;

• It was clear that the individual was providing services on behalf of the music school and not on his own behalf (ie, he was not conducting his own independent enterprise);

• The individual was required to deliver the lessons personally, and had no right to delegate;

• The bulk of the commercial risk lay with the music school; and

• The individual was provided with all tools and equipment that he needed for lessons.

That is, unlike in Moffet, the AAT did not need to consider the expanded definition of employee under section 12(3) of the SG Act as they found that the teacher was a common law employee (and therefore an employee under the ‘ordinary definition’ in section 12 of the SG Act).

Contractor plumber found to be employee for SG purposes

In the AAT decision of Trustee for Virdis Family Trust t/a Rickard Heating Pty Ltd v FC of T [2022] AATA 3 (Virdis), the AAT relied on the decision in Moffet to find that a plumber who was engaged as a contractor was an employee for SG purposes.

Here, the applicant carried on a business of selling and installing cooling and heating systems. The business engaged a number of employees, but from 2011 also engaged an individual (Mr P) to do plumbing work as a casual subcontractor.

At the start of their working relationship, Mr P had a series of conversations with a director of the business. They agreed that Mr P would work for an hourly rate, plus payment for a tank of petrol a week.

There was also a written agreement which identified Mr P as being ‘employed’ in the position of ‘sub-contract plumber’. The agreement provided that ‘your ordinary hours of work will be 40 hours per week, plus any reasonable additional hours that are necessary to fulfil your duties or as otherwise required by your employer’. The agreement did not refer to anything about an ability for Mr P to delegate his work to be done under the agreement.

In practice, Mr P was told where he was required to work and he would then complete that work. He would keep a tally of the hours he worked, and each week he would render an invoice that had the number of hours he worked each day.

The AAT referred to the test from Moffet as to what is required to meet the expanded definition of employee under section 12(3) of the SG Act, namely that:

• There should be a contract;

• Which is wholly or principally ‘for’ the labour of a person; and

• That the person must ‘work’ under that contract.

• The AAT applied this test and found that Mr P was a deemed employee under the section 12(3) test, as follows:

• There were both oral and written contracts between Mr P and the business;

• The obligation to work, to provide labour, was personal to Mr P. There was no capacity, in either agreement, to delegate the obligation to work. Even though Mr P paid some expenses, this was hardly the benefit of the contract for the business. The main or substantial object of the contract was to secure Mr P’s labour (ie, it was ‘wholly or principally’ for Mr P’s labour);

• there is no dispute Mr P worked under the contract.

On that basis, the AAT found that the business was liable to pay super on behalf of Mr P, and therefore, was liable to pay the super guarantee charge.

Having found that Mr P was an employee under the expanded definition under section 12(3) of the SG Act, the AAT did not need to consider whether Mr P was an employee within the ordinary meaning of the term.

Lecturer found to be employee for SG purposes

The decision of JMC Pty Limited v Commissioner of Taxation [2022] FCA 750 (JMC Case) is an important one as it was determined after the High Court decisions referred to above. Ultimately, the Federal Court found that an ‘independent contractor’ was an employee for super guarantee purposes.

JMC provided higher education programmes within the creative industries sector. It engaged Mr H, a qualified sound engineer/technician to provide JMC with “teaching services”. Those teaching services involved delivering lectures to JMC’s students at its Melbourne campus and marking student examinations or assignments.

The terms on which Mr H was engaged by JMC were recorded in writing. They included:

• That JMC would pay Mr H an hourly rate for delivering lectures and marking exams;

• That Mr H was required to submit invoices to JMC specifying the details of the teaching services he had provided;

• Those invoices were to be accompanied by time sheets and signed weekly lesson plans;

• That JMC, through its managing academic officer, had a degree of oversight and control over Mr H, including when, how and where he was to provide the teaching services.

Mr H provided the teaching services and submitted his invoices to JMC. JMC paid the invoices but did not make any superannuation contributions in respect of Mr H on the basis that Mr H was an independent contractor rather than an employee of JMC.

The Court looked at both definitions of employee under the SG Act.

In applying the ordinary definition of employee, the Court referred to the recent decisions of the High Court in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 96 ALJR 89 (Personnel Contracting) and ZG Operations Australia Pty Ltd v Jamsek (2022) 96 ALJR 144 (Jamsek), stating that those decisions had made it clear that the characterisation of the relationship between parties to written contracts of the sort in question in this case must proceed by reference to the respective rights and obligations of the parties under the contracts.

The Court noted that, under the contracts between Mr H and JMC:

• JMC effectively directed and controlled when, how and where Mr H was required to perform the relevant teaching services;

• While Mr H had a right to sub-contract or assign the provision of his teaching services under the contract, the scope and potential operation of this clause was very limited. Importantly, Mr H could only sub-contract or assign the services if he obtained the written consent of JMC’s representative. He could not unilaterally decide to sub-contract or assign the services;

• A number of operative clauses made it clear that the default or expected position was that Mr H would himself personally provide the teaching service. This included clauses which provided that Mr H was required to ‘personally’ provide the teaching services on the basis of representations Mr H had made about his relevant qualifications;

• Mr H was contracted to provide services (delivering lectures and marking papers) at hourly rates, as opposed to being contracted to produce a product or result. That is, none of the operative clauses of the contracts were expressed in terms of Mr H being remunerated for the production of an identified or readily identifiable product or result.

In relation to the ordinary definition of employee, the Court found that on balance, the totality of the legal rights and obligations provided for in the contracts between JMC and Mr H indicated that the relationship was that of employer and employee, as opposed to principal and independent contractor, and that Mr H was, for all intents and purposes, employed by JMC as a lecturer to provide lecturers to JMC’s students and mark their papers.

In relation to the expanded definition of employee, the Court found that the contracts were principally for the labour of Mr H in that the substantial or predominant purposes of the contracts was that Mr H would personally provide his labour in order to provide the teaching services in accordance with his representations as to his appropriate qualifications.

The benefit that JMC obtained from the contracts was principally, if not wholly, Mr H’s labour in providing the teaching services. Mr H was not contractually obliged to provide any equipment or tools in providing the teaching services. Accordingly, the Court found that Mr H was also an employee under the expanded definition under section 12(3) of the SG Act.

Current position

In relation to the “ordinary” meaning of employee under section 12(1), the decisions in Personnel and Jamsek emphasised the primacy of the contractual terms in determining the nature of the relationship between the parties. This will include both express (eg, the wording of the actual employment/engagement agreement) and implied terms (eg, in written correspondence and arrangements between the parties, as in the JMC Case). The multi-factorial employment test, which requires consideration and balancing of factors such as control, risk and independence, is still relevant where there is no written contract between the parties (see, for example, the Olias decision).

For the expanded meaning of employee under section 12(3), where there is an obligation to provide the labour personally (ie, no right to delegate), the contractor is likely to be a deemed employee for super guarantee purposes (see, eg, Virdis; JMC Case). Similarly, where the contract is ‘wholly or principally’ for the labour of the person, as opposed to, for example, being in part for the labour and in part for the provision of goods or equipment, section 12(3) is likely to apply (see, for example, JMC Case).

Unfortunately, the High Court did not directly consider the interpretation and application of section 12(3) in the Personnel and Jamsek decisions. In Jamsek, the High Court found that the contractors were not common law employees but remitted the section 12(3) cross-appeal to the Full Federal Court to enable that matter to be determined following the joinder of the Commissioner of Taxation.

For the time being then, the authorities referred to above represent the current case law on section 12(3).

How to manage contractor risk

As set out above, there has been a recent series of cases involving “independent contractors” who were subsequently found to be “employees” for super guarantee purposes. Employers should therefore review their relationships with contractors and be mindful of their potential super guarantee obligations, as significant penalties, charges and interest apply for late/underpayment of super guarantee.

Options to mitigate risk could include engaging incorporated contractors (as they are not caught by the definition of employee under the SG Act) or where there is any ambiguity, making superannuation contributions on behalf of all contractors (noting that their hourly rate may need to reduced accordingly).

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If you have any questions about how super guarantee should apply in your circumstances, please contact our specialist team at:

Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163  
E: pbroderick@sladen.com.au           

Philippa Briglia
Senior Associate
T +61 3 9611 0173
E pbriglia@sladen.com.au

Jan Oh
Graduate Lawyer
T +61 3 9611 0158
E joh@sladen.com.au