Superannuation and independent contractors – fresh Full Federal Court guidance

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Key takeaways

• In February 2022, the High Court handed down its landmark decision in ZG Operations v Jamsek [2022] HCA 2, which clarified the test for determining whether a worker is an employee or an independent contractor (see our previous alert on the decision here).

• The High Court remitted the question of whether the workers were ‘employees’ under the extended definition of that term in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act) back to the Full Federal Court.

• In deciding that the relevant workers were not ‘employees’ under the extended definition in section 12(3) of the SGA Act, the Full Federal Court determined that section 12(3) does not apply to an independent contractor relationship where the worker uses a company, trust or other service vehicle to contract with the putative employer instead of doing so in their personal capacity. This confirms ATO guidance in SGR 2005/1.

• Additionally, in determining whether a worker is an ‘employee’ under the extended definition in section 12(3), the Full Federal Court has confirmed that a worker will not be taken to work under a contract that is “wholly or principally for [their] labour” in the following circumstances:

Background

The superannuation guarantee regime

Employers are required to provide their employees with a minimum level of superannuation support (currently 10.5% of an employee’s ‘ordinary time earnings’) each quarter, otherwise the employer will become liable to pay the ‘superannuation guarantee charge’.  An ‘employee’ for the purposes of the SGA Act includes an employee at common law.   The SGA Act also includes a number of provisions which extend the meaning of ‘employee’.  Relevantly, section 12(3) of the SGA extends the meaning of ‘employee’, so that:

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.

This provision is broad and captures many independent contractor relationships.  An entity that engages an independent contractor under a contract of this nature is required to provide the contractor with superannuation support (otherwise they will become liable to pay the ‘superannuation guarantee charge’).

Factual background

The Appellants are truck drivers (the Drivers) who were engaged (in their capacity as partners of their respective partnerships) by the Respondent, ZG Operations Australia Pty Ltd (ZG Operations), under a series of contracts to provide delivery services.  Under the arrangements, the Drivers were required to supply and maintain their own trucks in order to perform the services.

The Drivers initially commenced proceedings against ZG Operations seeking declarations in respect of statutory entitlements alleged to be owed to them on the basis that they were either common law employees of ZG Operations or ‘employees’ under the extended definition in s 12(3) of the SGA Act.  If either allegation was successful, ZG Operations would be liable to pay the superannuation guarantee charge in respect of the Drivers.

The Drivers were unsuccessful at first instance and appealed to the Full Federal Court. The Court held that the Drivers were common law employees of ZG Operations and made no decision on section 12(3). That decision was appealed to the High Court which held that the Drivers were not common law employees of ZG Operations and the case was remitted back to the Full Federal Court to decide the section 12(3) issue. The Commissioner of Taxation (Commissioner) was joined as a party to the remitted case and made submissions in support of ZG Operations' position that section 12(3) did not apply to the Drivers.

The reason for joining the Commissioner as a party is because, if the Drivers were successful, ZG Operations would have been liable to pay the superannuation guarantee charge. The charge is imposed as a tax and administered by the Commissioner (with the potential imposition of penalty tax and interest). The Commissioner would then be required to remit any charge recovered to the Drivers’ superannuation funds.

Decision

The Full Federal Court (Perram, Anderson and Wigney JJ) held that the Drivers were not employees under section 12(3) of the SGA Act as they were unable to satisfy the three-limbed test which had previously been set out by the Full Federal Court in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118.  The test requires that:

1. there should be a “contract”;
2. the contract is wholly or principally “for” the labour of a person; and
3. the person must “work” under that contract.

In particular, the Court held that the Drivers were unable to satisfy the first two elements of the test.

There was no “contract” between the Drivers and ZG Operations

The Drivers had contracted with ZG Operations in their capacity as partners of their respective partnerships (each partnership comprising the Driver and the Driver’s wife).  The Court held in this context that there was no contract between the Drivers in their individual capacity and ZG Operations. 

The Court held that section 12(3) could not apply to this relationship because the language of the provision requires the contract to be entered into by a natural person in their individual capacity. 

In particular, section 12(3) was found only to be capable of operating where:

1. an identified natural person (the Worker) is a party to the contract in their individual capacity;
2. the Worker works under the contract; and
3. the party on the other side of the contract makes payments to the Worker in respect of their labour under the contract.

This interpretation was contended for and supported by the Commissioner.  This is not unexpected given the Commissioner’s public position in Superannuation Guarantee Ruling SGR 2005/1 that:

Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the [SGA Act], either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual.

The Court confirmed, however, that it is still possible for section 12(3) to apply where a natural person enters into a contract in their individual capacity alongside their personal service company or trust.  Depending on how the contract is drafted, simply adding a personal service company or trust as another contracting party should not prevent section 12(3) from applying in circumstances where the natural person (in their individual capacity) is obliged to provide their labour under the contract. The situation may be different, however, if the natural person is a party to the contract but only makes promises under the contract that do not relate to their personal labour (for example, providing certain warranties or indemnities).

The contract was not “for” the labour of the Drivers

The question of what the contract is “for” is to be assessed from the perspective of the putative employer (i.e. ZG Operations) by having regard to the terms of the contract.

Non-labour components

The Court found that the contract could not be ‘wholly or principally’ for the labour of the Drivers as the ‘contracts required the use of a substantial capital asset, the trucks, for which the partnerships were wholly responsible’ (at [57]).  The partnerships also took on the costs and risks of operating the trucks and were responsible for the maintenance of insurance. While labour was required to be provided in order to deliver the goods, Wigney J found that ‘the size of the capital commitment represented by the need to provide functional and properly maintained delivery trucks [meant that] labour could not be said to be the principal or predominant component’ (at [77]). 

Perram and Anderson JJ alternatively held that where the contract required the provision of a “single integrated benefit” that involved both labour and non-labour components, whether the contract was ‘wholly or principally’ for labour required a quantitative valuation and comparison of the various components. Their Honours found that the Drivers had failed to adduce quantitative evidence at trial which demonstrated the market value of the different components of the contract.  Without this evidence, it was not possible to quantify the value of the labour component of the delivery service compared to the other benefits that ZG Operations obtained under the contracts.  As such, the Drivers were unable to discharge their onus of proving that any of the contracts were ‘principally’ for the labour of either Driver.

There are a couple of relevant observations in relation to the Court’s finding on this point:

• In this case, the Drivers bore the onus of proof because they had initiated the proceedings seeking a declaration as to their status as ‘employees’. In other cases, the section 12(3) issue may arise in the context of a challenge to an assessment of superannuation guarantee charge issued by the Commissioner. In such cases, the onus of proof would rest with the employer and not the Commissioner.
• The provision of a ‘substantial capital asset’ (such as a truck) is likely to be distinguishable from many situations where a contractor is required to provide their own tools and equipment. Accordingly, a contractor who is required to supply their own tools and equipment as well as their labour may still be engaged under a contract that is ‘wholly or principally for their labour’, unless the tools and equipment are highly specialised or require a substantial capital commitment.

Right of delegation

The Court also confirmed that an employment relationship cannot exist under section 12(3) where the contractor has the ability to delegate the performance of the work under the contract to other persons (as this means the contract is not “for” the contractor’s personal labour). Perram and Anderson JJ held that, because the contracts allowed the partnerships to delegate the work to a substitute driver with agreement from ZG Operations, this meant the “performance of the contractual obligations was not personal to [the Drivers]” (at [58]).

Contract for a “result”

The Court confirmed (in obiter) that a contract for labour cannot exist under section 12(3) where the contractor is engaged “to produce a given result”. In this case, the Court held that the contracts were not “for a result”. The factors that the Court considered relevant to this finding included that the Drivers were remunerated:

• based on an hourly rate, rather than per item delivered;
• for a set number of hours each working day, even if less hours were actually required to be worked.

These findings build on the earlier decision of Wigney J in JMC Pty Limited v Commissioner of Taxation [2022] FCA 750, in which the mode of remuneration was seen a key factor in determining whether a contract is “for a result”. In particular, time-based remuneration points against a contract being “for a result”. It may well be the case that, if the Drivers had been remunerated on a per-delivery basis, the contract could have been characterised as being “for a result”.

Proposed amendments to the Fair Work Act

Employer obligations to pay superannuation remains a hot issue.

Currently, absent an entitlement to superannuation under an award or enterprise agreement, a worker who meets the definition of an 'employee' under the SGA Act (including the extended definition in section 12(3)) cannot directly enforce the employer’s obligation to make superannuation contributions. Rather, the Commissioner is responsible for enforcing the employer’s liability to the superannuation guarantee charge in cases where superannuation contributions are not made voluntarily by the employer.

On 29 March 2023, the Government introduced a Bill amending the Fair Work Act 2009 (Cth) to include the obligation to pay superannuation contributions within the National Employment Standards as a workplace entitlement. If the Bill is passed, this will mean that “national system employees” (as defined in the Fair Work Act 2009) (or employee organisations or Fair Work Inspectors on their behalf) would be able to directly recover from an employer any unpaid superannuation contributions in circumstances where the employer would be liable for the superannuation guarantee charge. A failure of an employer to comply with the obligation would also be a civil penalty provision and could result in the imposition of penalties subject to certain carve outs where an employer is also pursued by the Commissioner of Taxation for an amount owed to an employee.

However, because the National Employment Standards apply only to common law employees, it appears that these amendments will not affect the situation of an independent contractor who is an ‘employee’ only under the extended definition in section 12(3) of the SGA Act. In such cases, the existing system of enforcement of the superannuation guarantee charge by the Commissioner will remain the only option for recovery of unpaid superannuation contributions.

Conclusion

There are a number of factors that need to be considered when determining whether an independent contractor is an employee at common law or under section 12(3) of the SGA Act.  Please reach out to our specialised employment and tax teams if this is an issue for your business.