Don’t Have to Pay Superannuation for Contractors? Think Again!

The Commissioner of Taxation (“the Commissioner”) is ramping up efforts to identify unpaid superannuation entitlements by businesses who have been incorrectly operating under the assumption that contractors are not entitled to receive superannuation contribution payments. Under the Superannuation Guarantee (Administration) Act 1992 (“the Act”), contractors may be entitled to superannuation where they are classified as an employee for the purposes of the Act. The definition of ‘employee’ under the Act is much broader than that commonly understood.

When are superannuation contribution payments owed?

Superannuation guarantee contribution payments must be made by an employer to employees via their nominated super fund. Payments must be made at least quarterly and cannot be less than the minimum amount (the Superannuation Guarantee). The superannuation guarantee is set to increase to 12% from 2021 to 2025 and is currently 10.5% of the remuneration for ordinary working hours in the 2022-2023 financial year (“FY”). Importantly, as a result of legislative changes taking place on 1 July 2022, the superannuation guarantee payment must be paid in respect of all employees, not just those earning over $450 per calendar month as was the case with respect to periods prior to FY 2022-2023.

Employee or contractor?

The distinction between an employee and contractor has long been the subject of judicial analysis. For the past 20 years, the approach under general law has been to analyse the overall circumstances of the relationship giving consideration to elements such as control, right of refusal of work, entitlements to take leave, engagement under an ABN or ACN, method of payment and issuing of invoices, and the integration of the worker into the business (such as whether they wear a uniform). This is known as the multifactorial test. Recently however, two cases, ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (“Jamsek”) and Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (“Personnel”), modified this approach.

Now, in determining the status of a worker as either a contractor or employee, the primacy of the written agreement between the parties is emphasised, instead of first applying the multifactorial approach. The High Court stated that where the parties are bound by a valid written agreement that clearly stipulates their rights and obligations, their relationship will not be impacted by the conduct of the parties if they are complying with the provisions of the written contract. This means that, provided they are acting as set out in the contract, their conduct will not otherwise hold weight in the characterisation of the worker as either an employee or contractor.

Notably, in Waring v Hage Retail Pty Ltd (2020) FWC 540 (“Waring”) the Fair Work Commission observed as follows:

“The Court has stated that contractual terms and non-performance, where those terms can be ascertained and where the contract is not a sham, will determine the true nature of the relationship…”.

This means that in determining what type the worker is, the Court will have regard first to the written terms of the contract. Businesses should take heed and ensure that all engagements are reduced to a written contract, whether that be for an employee or a contractor.

Why is this issue important in the context of contractors and superannuation? It is commonly understood that principals do not need to make superannuation guarantee payments with respect to contractors as they are not employees. Given the decisions by the High Court relating to contractors, many clients have assumed that this has strengthened the argument that superannuation does not have to be paid in respect of those individuals engaged as contractors. This is not only incorrect but the failure to make superannuation guarantee payments can be costly for the business and give rise to significant liability and penalties.

What is the extended definition of employee?

The Act was established to ensure that employers make minimum superannuation contribution payments on behalf of eligible workers in addition to their remuneration. Whether superannuation is payable in respect of a worker is predicated on whether or not they are an employee (for the purposes of the Act, not as understood under general law). For the purposes of the Act, Section 12(3), extends the definition of ‘employee’ beyond the ordinary meaning to include a person who “works under a contract that is wholly or principally for the labour of the person.”

As set out below, this has been held to include contractors who provide their labour to principals. For example, if a business engages an individual directly in their personal capacity (i.e. Lara Alto, irrespective of whether they have an ABN or not) to perform services that require them to predominantly provide personal services such as record keeping, they will likely be an “employee” for the purposes of the Act. However, if the business engages a worker through their company (i.e., Lara’s Music School Pty Ltd) then the business will not be liable for superannuation payments.

Moffet’s Case

Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (“Moffet’s Case”) concerned a dentist who sold his practice but who then continued to provide dental services as an independent contractor to the new owner. He provided the new dental practice with two benefits: 1) services as dentist, and 2) a guarantee as to a minimum annual cash flow. The Court found that his ability to uphold his guarantee was predicated on his ability to provide dental services (providing labour) and therefore found that the agreement was “wholly or substantially for the new dental practice to receive the benefit of his labour.” As such, the new dental practice was required to make superannuation guarantee payments.

Specifically, Moffet’s Case established that there is no need to examine the nature of the engagement between the principal and the contractor, i.e., whether the individual is a bona fide contractor or not. All that must be ascertained is whether the following three elements of s12(3) of the Act are satisfied:

1. There is a contract;
2. That the contract is wholly or principally for the labour of a person; and
3. That the person must work under that contract (this means that there is an individual working under the contract, not a company; and that there is usually no right to delegate the work under the contract).

Importantly, this means that, irrespective of whether the individual is a bona fide contractor or not under general law, what is relevant instead, is whether the individual is an employee for the purposes of the Act as per the above trifold test outlined above.

Virdis’ Case

Moffett’s Case has more recently been applied in the decision of The Trustee for Virdis Family Trust v FCT (2022) (“Virdis Case”) on 5 January this year. This case was heard by the Administrative Appeals Tribunal (“AAT”) and found that where a plumber was remunerated by the business as an independent contract for his services, superannuation payments were due because the contract was wholly or principally for the labour of that plumber. In the Virdis Case the business argued that the plumber was a contractor not an employee. However, the AAT applied Moffett’s Case and found that this was not a relevant consideration. Instead, it considered whether the contract provided for the performance of work which was ‘wholly or principally for labour of the person’. In making that inquiry, the AAT found that the sole benefit under the contract was the provision of labour and therefore superannuation guarantee payments were due.

Importantly, this finding was made despite a provision in the independent contractor agreement to the contrary, which stated the contractor was responsible for the payment of their own superannuation. Notwithstanding, the AAT found that despite this contractual clause, as the entitlement to superannuation is enshrined in legislation, it cannot be excluded by contract.

JMC Pty Limited v Commissioner of Taxation

The very recent decision handed down on 29 June 2022 of JMC Pty Limited v Commissioner of Taxation [2022] FCA 750 (“JMC Case”) concerns JMC Academy and their engagement of a qualified sound engineer as a lecturer. The lecturer, Mr Harrison, was engaged on several occasions from 2011. The key features of the engagement were as follows, Mr Harrison:

1. had to keep and submit timesheets, invoices and weekly lesson plans;
2. was subject to the monitoring and oversight by JMC;
3. was engaged to provide teaching services including lecturing and marking exams and assessments; and
4. had no contractual right to sub-contract the work without the approval of JMC, in their absolute discretion.

JMC also operated on the assumption that he was engaged as a contractor and did not make superannuation contribution payments.

The Court considered whether Mr Harrison was an employee under general law and within the extended meaning under the Act. As for its analysis as to whether Mr Harrison was an employee under general law, the multifactorial was first applied, until the law changed, and the scope of consideration was narrowed to the terms of the agreement (or Memorandum of Understanding in this case). To that end, the Court found that he was an employee under general law.

The Court then went on to consider whether Mr Harrison was an employee for the purposes of the Act and applied the test in Moffet’s Case. Namely, the Court considered whether the contract with Mr Harrison was wholly or principally for his labour.

In doing so, the Court found that Mr Harrison was engaged under a contract, and that contract was for his labour in providing teaching services comprising teaching and marking assignments, among other things. As he was remunerated on an hourly rate basis, it was found that the work was not for the production of results, but rather for his labour. In determining whether Mr Harrison performed ‘work under the contract’, the Court gave consideration to the fact that he was engaged as an individual and that he was prohibited from delegating the work without the express permission of JMC. As such, the Court dismissed JMC’s attempt to challenge the decision of the Commissioner for Taxation, with costs.

Interestingly, the JMC Case found that if the contract contains a limited right to sub-contract, it is likely not to be wholly for the labour of the person but may nonetheless still be principally for the labour of the person.

Key Takeaways

The cases examined in this alert clearly emphasize the misapprehension under which many business owners appear to be operating. That is, that where a worker is an independent contractor under general law, they will not be subject to superannuation contribution payments. This is not correct. As discussed above, the meaning of employee for the purposes of the Act is far reaching and may mean that a business is liable for superannuation contribution payments for its contractors.

In light of this, it is important to take note of the following key takeaways:

1. It is always necessary to ensure that a business has properly characterised its relationship with workers and determined if they are true employees or independent contractors?
2. Businesses should have a written contract with their employees and independent contractors, clearly setting out the rights and responsibilities of the parties;
3. Even if an individual is properly classified as an independent contractor under general law, it may still be possible for them to be classified as an employee under the Act and be entitled to receive superannuation benefits;
4. In considering whether a worker is an employee for the purposes of the Act, a prudent business owner must consider whether they meet the following:
   • are they engaged under a contract?
   • is the work wholly or principally for labour and not for a fixed result (e.g., to deliver a product or fixed result)?
   • are they engaged as an individual or under a company?
5. If a worker is an employee for the purposes of the Act, then the business will need to make superannuation contribution payments at least quarterly at the minimum prescribed rate (currently 10.5%);
6. From FY 2022-2023 onwards, there is no threshold and superannuation is payable to all class of persons who satisfy the definition in the Act;
7. The superannuation contribution payment is subject to change each year and is currently set to increase incrementally to 12% by 2025;
8. There is no statute of limitation with respect to unpaid superannuation; and
9. The Commissioner of Taxation is actively pursuing this issue, including auditing business. If you are concerned that your business may have unpaid superannuation liabilities, you should seek legal advice as there may be reduced consequences for business who voluntarily approach the ATO as opposed to waiting to be ‘found out’, so to speak.

We regularly advise our clients as to whether a worker is a contractor or an employee and the liabilities that arise with respect to superannuation and other entitlements.

If you require any assistance or information in relation to this client alert, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.