Who is an employee for superannuation guarantee purposes after decisions in Personnel Contracting and Jamsek?

In brief - Federal Court applies recent High Court decisions to find that a person who provided teaching services to a higher education provider was an employee for superannuation guarantee purposes.

The decisions of the High Court in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 established that whether a person was an employee was not to be determined by a multifactorial assessment of the totality of the relationship, but was instead to be determined by the terms of the contract.

Those decisions are arguably contrary to the published views of the Australian Taxation Office on the meaning of employee for income tax and superannuation guarantee purposes (see, for example, TR 2005/16 and SGR 2005/1).

Ordinary meaning of employee

The decision of the Federal Court in JMC Pty Limited v Commissioner of Taxation [2022] FCA 750 considered the effect of the High Court decisions in the context of whether an individual was an employee for superannuation guarantee purposes. It is a very useful decision as it summarises the principles and demonstrates how they are to be applied in practice.

For superannuation guarantee purposes, employee has its ordinary meaning as well as an extended meaning. The extended meaning covers a person who works under a contract that is wholly or principally for their labour. Only the ordinary meaning of employee was considered by the High Court cases, as they did not concern the superannuation guarantee provisions.

The principles for the ordinary meaning of employee are:

1. where there is a comprehensive written contract between the parties, the terms of the contract are decisive of the character of the relationship, except if the contract is a sham, or its terms have been varied or waived or subject to an estoppel

2. the contract must be construed and characterised at the time it was entered into

3. the ordinary principles of contractual interpretation apply

4. the circumstances surrounding the making of the contract, and events and circumstances external to the contract which are objective and known to the parties at the time of contracting, may be considered

5. generally it is not permissible to consider anything which the parties said or did after the contract was entered into, and a review of the entire history of the parties' dealings is neither necessary or appropriate

6. the fact that the conduct of the parties after the contract was entered into does not precisely align with their rights and obligations under the contract, or the fact that a particular right may have never been exercised or utilised, is generally irrelevant 

7. the conduct of the parties after the contract was entered into may be relevant to establish that the contract was a sham, or that the contract had been varied, or that certain rights under the contract were subject to an estoppel

8. the provisions of the contract that may be relevant to characterise the relationship include the provisions that deal with the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work, holiday entitlements, taxation, the delegation of work and the right to exercise direction and control

9. the characterisation of the relationship often turns on: (a) the extent to which the principal has the right to control how, where and when the service provider performs the work (b) the extent to which the service provider can be seen to work in their own business, as distinct from the business of the principal, but neither is determinative

10. the label used in the contract is not determinative and will rarely assist in characterising the relationship 

11. the nature of the parties may be relevant, for example, if the party that performs the services is a company or a partnership, as opposed to an individual, that may indicate that the relationship is not an employment relationship

12. if the contract gives the service provider an unlimited, unrestricted or unilateral power to delegate the contracted services to another person, that is a powerful indicator that the service provider is an independent contractor

13. if the contract requires the service provider to use or provide their own equipment, tools or other assets, or to meet their own expenses, the service provider is more likely to be considered to be an independent contractor.

Federal Court's findings on extended meaning of employee

The Federal Court found that three elements must be established before a person is an employee within the extended meaning - there must be a contract, the contract must be wholly or principally for the labour of the person, and the person must work under the contract.

In most cases, it will only be the second element that is in doubt. The Federal Court held that the second element is essentially whether the terms of the contract reveal that the benefit that the principal receives from entering into the contract is wholly or principally the labour of a person. Principally is synonymous with substantially or predominantly. A contract is not wholly or principally for labour if it is a contract for the provision or production of a result and the service provider is paid for that result.

Facts of the case in JMC Pty Limited v Commissioner of Taxation

The facts were that JMC Pty Limited provided higher education programmes in the creative industries sector. JMC engaged Nichollas Harrison to deliver lectures and mark assessments. JMC did not make superannuation contributions for Mr Harrison because it thought he was a contractor.

The Federal Court held that Mr Harrison was an employee, both under the ordinary meaning and extended meaning.

The Federal Court undertook a close analysis of the contract terms to reach its decision. 

It found that a number of the provisions of the contract gave JMC the right to supervise and monitor the teaching services, how they were provided and when and where they were provided. For example, the contract provided for supervision of the teaching services by one of JMC's employees, invoices had to be accompanied by signed lesson plans which were detailed and highly prescriptive, Mr Harrison was obliged to provide teaching services at particular times and at JMC's campus and Mr Harrison was obliged to comply with JMC's policies and procedures in relation to teaching and assessment.

This was to ensure that the teaching services were provided to achieve learning outcomes that were consistent with the accreditation requirements that JMC was subject to.

While Mr Harrison had a right to delegate the teaching services, it was limited because it was subject to the written consent of JMC and the terms of the contract indicated that Mr Harrison would himself provide the teaching services.

Mr Harrison was not contracted to produce a product or result. Instead he was paid an hourly rate for the teaching services provided irrespective of the outcome. Although the contract contained provisions which allowed JMC to withhold payment or require the services to be performed again, those provisions were a means by which JMC could manage and control the provision of the services. The contract did not provide that Mr Harrison was to be paid a fixed amount for each completed lecture or marked assessment. 

JMC has appealed to the Full Federal Court.

What does the decision mean for principals?

Principals need to closely review the terms of their contracts with service providers. 

If possible, contracts should provide that the service provider is being paid to provide a product or result, contain limited ability for the principal to control how, when and where the services are provided, provide for fixed remuneration for the product or result, rather than remuneration at an hourly rate, require the service provider to provide their own equipment and allow the service provider an unlimited right of delegation. 

It is also helpful to ensure that the service provider is a company or partnership.