Employee Vs Independent Contractor
The ATO’s recent Decision Impact Statements (DIS) on two Court cases provides some guidance on the term ‘employee’ for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA).
This in turn provides some key takeaways to the on-going saga of determining whether workers are employees or independent contractors.
In the Full Court's decision in JMC Pty Ltd v FCT [2023] FCAFC 76 (JMC) and the High Court’s decision in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek), both Courts held that the individual contractors were not “employees” for the purposes of either s12(1) or s12(3) of the SGAA.
Relevantly, s 12(1) of the SGAA states that “employee” and “employer” have their ordinary, common law meanings, while s 12(3) extends the requirement of an employer (or principal) to pay superannuation to a person who works under a contract that is wholly or principally for their labour.
Importantly, in their DISs, the ATO outlines their current approach to assessing whether a contract is wholly or principally for labour and in turn whether a worker is an employee requiring the principal to pay superannuation guarantee (SG).
The following are some key takeaways from the comments made by the ATO in their DISs, particularly on the extended meaning of the term “employee” under s 12(3). For the worker to be deemed an employee under this provision the following will be considered:
There should be a contract – The contract will be used to identify if there is natural person, i.e. an individual – who is a party to the contract in their personal capacity. Importantly, only a natural person can ‘work under a contract’. In Jamsek, the Drivers were not parties to the contracts, rather it was their partnerships that were the relevant parties to the contract.
Wholly or principally ‘for’ the labour of a person - The contract must be ‘for’ labour with this element being assessed from the perspective of the person engaging the service provider (i.e. the principal). Essentially, if there is a power of delegation, even if the consent of the ‘employer’ is required, then the contractor is free to do the work themselves or substitute another person to do the work (as was the case in JMC), the contract is not ‘for’ the labour of the contractor.
That the person must ‘work’ under that contract - A contract to produce a result is also not a contract for labour. However, to the extent that the contract involves a mix of labour and the provision of goods/equipment, a quantitative assessment to assess whether the contract is principally for labour needs to be made on the relative contributions of the labour component and the equipment component.
The ATO accepts the Court’s view that a quantitative analysis of the components of the service was the most appropriate valuation methodology for those cases. However, in assessing whether a contract is principally for labour under s 12(3), the ATO have stated that in some instances, a qualitative analysis is required on the components of a supply of services.
The essential message to businesses and their advisors in considering whether the worker is an employee or independent contractor, is in assessing whether the contract between the parties is for contracting services or wholly or principally for the labour of an individual(s). Both a qualitative and quantitative analysis of the labour component may be necessary.
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