Contribution entitlement

Employment arrangements can sometimes be unclear as to whether an individual is entitled to having superannuation contributions made on their behalf. DBA Lawyers director Daniel Butler reviews a recent legal case addressing this issue.

This article covers the topic of whether an individual is regarded as an employee or a contractor. It focuses on the ATO’s recent decision impact statement (DIS) regarding the full Federal Court in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48.

Background

By way of background, we have extracted some paragraphs below concerning the facts of Jamsek:

“Mr Jamsek and Mr Whitby were initially employed as drivers directly by ZG Operations from 1977. However, in 1985/86 the company negotiated a new arrangement with each driver and their wife as separate partnerships. Each partnership purchased a truck from the company and thereafter maintained their own equipment. Each partnership was paid for the delivery of goods via an invoice. Each driver argued they were placed under pressure to enter into these arrangements.

“Each truck driver on departure from the company in 2017 claimed they should be paid their employee entitlements that they had missed out on, including annual leave and superannuation guarantee (SG) contributions. This is not an uncommon claim for a departing purported contractor where the person may consider they missed out on these entitlements — thus, employers need to be mindful of this risk when considering the apparent advantages of hiring a contractor, in contrast to an employee.

“The primary judge of the Federal Court concluded the drivers were independent contractors. However, the full court overturned this decision and held that, having regard to the ‘substance and reality’ of the relationship, they were employees.

“The High Court unanimously held that Mr Jamsek and Mr Whitby were not employees within the ordinary meaning of that term.”

The High Court subsequently remitted back to the full Federal Court the issue regarding whether the drivers fell within the meaning of employee under section 12(3) of the Superannuation Guarantee (Administration) (SGA) Act 1992. Relevantly, section 12(1) of the SGA Act states the terms ‘employee’ and ‘employer’ have their ordinary meanings. However, section 12(3) provides for an expanded definition of an employee for SG purposes, namely: “If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”

Full Federal Court decision

The full Federal Court unanimously held Jamsek and Whitby did not fall within the expanded definition of employee under SGA Act section 12(3).

Importantly, the court concluded section 12(3) only applies if the party providing the labour or services is a natural person who entered the contract in their individual capacity and not in any other capacity, for example, as a partner in a partnership.

The court also found Jamsek and Whitby failed to adduce sufficient evidence to establish they fell within the scope of section 12(3).

ATO view

The ATO highlighted several aspects of section 12(3) that were clarified by the court, including:

• the application of section 12(3) requires an analysis of the content of a bilateral exchange of promises (regardless of the number of parties on each side of the contract),

• the SG regime cannot be circumvented by forming a contract that names more than two parties, and

• only natural persons entering contracts in such capacity can be deemed an employee for the purposes of section 12(3). Further, section 72(1) of the SGA Act does not operate to deem a partnership or other entity to be a natural person for the purposes of section 12(3).

The ATO also reiterated the considerations that apply in determining whether a contract is for labour with regard to the terms of the relevant contract, including:

• a contract designed for the provision of a result is not a contract for labour,

• remuneration calculated on a per hour basis points against a contract being for the provision of a result, while remuneration calculated with reference to a number of hours worked per day is inconsistent with a contract being for a result,

• a substantial capital asset being required to provide services points towards the contract not being wholly or principally for labour,

• the existence of a right to delegate under a contract means the performance of the contract is not personal to the individual engaged to provide the service (that is, the contract will be for the provision of a service, not for the labour of the individual), and

• it may not be appropriate to divide the contract into components when determining whether the contract is wholly or principally for labour where a contract is for a single integrated benefit (that is, a delivery service).

The DIS also provides guidance on whether an analysis of a contract should be quantitative or qualitative. Broadly, the court found quantitative evidence from Jamsek and Whitby regarding the market value of components of the delivery service was required to show the contract was at least principally for labour. However, the tax commissioner has clarified in the DIS there will be instances where a qualitative analysis of components of a service should be used. However, no further guidance was provided as to circumstances that would warrant a qualitative review.

Conclusion

We recommend individuals who engage contractors should ensure they have comprehensive written contracts that are appropriately worded to reflect the latest guidance from the ATO. Further, the DIS notes the commissioner is considering whether changes are required to a range of ATO material, including Superannuation Guarantee Rulings 2005/1, 2005/2 and 2009/1 and ATO Interpretive Decision 2014/28. Therefore, individuals and entities seeking to rely on these ATO materials should be mindful they are subject to potential change.

There is considerable complexity in ensuring that a true contractor relationship exists especially after recent changes to the Fair Work Act 2009, which, in essence, seeks to reverse the High Court decisions that focus on the primacy of the contract.