A recent decision of the Federal Court of Australia – Full Court (Full Court) has provided some clarity to employers in relation to when the obligation to pay superannuation will or will not arise.
The Superannuation Guarantee (Administration) Act 1992 (SGA Act) requires employers to pay the superannuation guarantee for certain “employees” to avoid the superannuation guarantee charge. The SGA Act defines an “employee” by reference to its ordinary meaning; however section 12 also expands the definition to deem others as an employee for the purposes of the SGA Act.
One of the extended meanings of the term is that a person who “works under a contract that is wholly or principally for the labour of the person” is deemed to be an employee, under s12(3) of the SGA Act. This is an important subsection when considering whether or not the superannuation guarantee is payable for independent contractors.
The matter of JMC Pty Limited v Commissioner of Taxation [2023] FCAFC 76 considered both the ordinary and the extended meaning of an employee for the purposes of the SGA Act and, in particular, whether or not an independent contractor had been an employee of JMC Pty Limited (JMC).
JMC initially commenced proceedings objecting to the Commissioner of Taxation’s issue of assessments of superannuation guarantee charges for Mr Harrison, in respect of whom JMC had not paid the superannuation guarantee for certain periods.
JMC was a provider of higher education programmes and Mr Harrison had been engaged as an independent contractor to provide teaching services (by way of lectures and marking student exams and assignments) between the periods of April 2013 –June 2016 and July 2017 – March 2018.
Mr Harrison’s engagement was pursuant to a number of contracts as well as a Memorandum of Agreement (the MOA), which was replicated in substantially similar terms and signed on two more occasions.
The Commissioner had issued the assessments on the premise that Mr Harrison was either an employee within the ordinary meaning of the word, or he was a deemed employee under section 12(3) of the SGA Act.
At first instance, the Federal Court concluded that Mr Harrison was an employee within both the ordinary meaning of the word and the extended meaning of the word.
The Federal Court’s primary consideration in finding that Mr Harrison was an employee within the ordinary meaning of the word was that it considered there was a contractual right to control when, where and how Mr Harrison was to provide the teaching services personally. According to the Federal Court, this resulted in him being subservient to JMC and the teaching services being subservient to and dependent on JMC’s businesses.
The Federal Court was of the view that the only real basis for a different conclusion was the fact that the MOA provided a contractual right to subcontract or assign the teaching services. However, it considered this right to be “limited, narrow in scope and in reality a chimera which was unlikely to be ever exercisable or exercised”, and could not be unilaterally exercised because it was subject to JMC’s effectively unfettered discretion to refuse to consent.
According to the Federal Court, this reasoning meant that the contracts under which Mr Harrison performed work were “wholly or principally for [his] labour” and he was therefore an employee under the extended meaning of the word as well.
JMC appealed this decision, primarily raising concerns that the primary judge had erred by unduly confining the scope of Mr Harrison’s right to subcontract or assign. It was claimed that the primary judge had overstated the effect of JMC’s right to prevent subcontracting or assignment by withholding consent and that the primary judge had erroneously considered whether or not Mr Harrison’s right had in fact been exercised.
The Full Court allowed the appeal and found that the primary judge had erred in finding that Mr Harrison was an employee under the SGA Act.
In particular, it disagreed with the primary judge’s finding that Mr Harrison had only an illusory or chimerical right to subcontract or assign the services. It considered that the proper point of significance (as established by the case law) was that he had the right to subcontract or assign, and not whether it had been exercised in the past or would be exercised in the future. According to the Full Court, the mere existence of a requirement for written consent did not rob Mr Harrison of his right especially in circumstances where it was most likely that consent would only be refused in good faith and would not be unreasonably withheld.
As the parties had not pleaded that the contract was a sham, there was no basis for the primary judge to find that the right was contractually ineffective or otherwise not exercisable.
The Full Court found that the right was a real and substantial right and this was inconsistent with an employer/employee relationship. It stated at [75]:
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.
The Full Court also disagreed with the primary judge’s findings about the level of control that JMC had over Mr Harrison’s provision of the teaching services. In doing so, the Full Court formed the view that the primary judge had failed to have proper regard to the practical context in which the services were provided.
Asa result of the above, the Full Court also found that the primary judge had erred in finding that Mr Harrison was an employee under the extended meaning of the word.
As Section 12(3) of the SGA Act required attention to be given to the rights under the contract and not the actual performance of the contract, and the contract allowed Mr Harrison to perform the contract personally but also to subcontractor assign the contract with JMC’s consent, it was not a contract “wholly or principally for [his] labour”.
Accordingly, JMC’s objection to the Commissioner’s assessments of superannuation guarantee charges was upheld as Mr Harrison was not an employee under the SGA Act.
This decision highlights the importance of the right to subcontract or assign services in independent contractor arrangements, for the purposes of the SGA Act and determining whether or not superannuation is payable.
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