It is widely understood that the status of a worker as an employee or independent contractor is based on a range of common law tests. Generally, where a worker contracts to achieve a result the relationship between the parties will be one of principal and independent contractor. In contrast a worker who contracts to provide their labour (to enable the other party to achieve a result) will generally be an employee.
What is sometimes less clearly understood is that the definition of ’employee’ for superannuation guarantee (‘SG’) purposes is a much broader concept than merely a person who is an employee under common law tests (‘common law employee’).
Recently, we have seen a number of cases challenging the Superannuation Guarantee (Administration) Act 1992 (‘SGAA’) status of a person who is not a engaged as a common law employee. The two most recent cases are Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (‘the Moffet case’)(noting that this case did not involve the Commissioner of Taxation) and MWWD and Commissioner of Taxation [2020] AATA 4169 (‘ the MWWD case’).
A key question in both these cases was whether the relevant individuals were employees for SG purposes under s. 12(3) of the SGAA, which states:
‘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.’
In other words, the cases considered whether the individuals were contracted wholly or principally for their labour – if so, they would be employees for SG purposes notwithstanding the fact they were independent contractors. It should be noted that s 12(3) of the SGAA is only one of several provisions that extends the scope of who is an employee for SG purposes.
This article examines the statutory interpretation of s. 12(3) of SGAA in the context of the Commissioner of Taxation’s (‘Commissioner’) interpretation of the subsection as compared to the interpretation in the aforementioned cases.
The Commissioner’s position
The Commissioner’s view on when an individual is an employee under of s. 12 of the SGAA (including s. 12(3)) is outlined in Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee : who is an employee ? (‘SGR 2005/1’).
As outlined in SGR 2005/1, in relation to s. 12(3) the Commissioner considers a contract to be wholly or principally for the labour of the person engaged where the terms of the contract and the conduct of the parties indicates that:
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- the individual is remunerated (either wholly or principally) for their personal labour and skills;
- the individual must perform the contractual work personally (there is no right of delegation); and
- the individual is not paid to achieve a result.
The Commissioner further notes that:
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- It is clear from Nealeand World Bookthat a person who has ‘a right to delegate work’ (whether or not that right is exercised) does not work under a contract wholly or principally for his or her labour and that a contract for labour must be distinguished from ‘a contract to produce a given result.’
Given the above commentary from the Commissioner, the author postulates that the accepted view is that if one of the above characteristics is absent from the arrangement (e.g. if the individual was paid to achieve a result), the contract would arguably not be wholly or principally for the labour of the person engaged and the individual would not be an employee under s. 12(3). However, whether the accepted view is applied consistently is a separate question as evidenced by the below cases.
The Moffet case
In the Moffet case, the person engaged (Dr Moffet) was a dentist who had previously operated his own dental practice through a family trust before selling his dental practice to Dental Corporation Pty Ltd (‘Dental Corporation’). In connection with the sale, a Services Agreement was executed between Dr Moffet and Dental Corporation, the terms of which included:
- the provision of the personal service of Dr Moffet both as a dentist and in practice managerial services;
- a remuneration model based on a percentage share of revenue that Dr Moffet personally generated in consequence of his own work as a dentist;
- a performance bonus which was a function of the revenue generated by the practice (as a whole); and
- if the revenues of the practice fell below a certain minimum figure, compensation by Dr Moffet to Dental Corporation for the shortfall.
There was also an obligation for Dental Corporation to provide administrative services to Dr Moffet.
Upon termination of the Services Agreement Dr Moffet brought action to the Federal Court on the basis that he was a common law employee of Dental Corporation and was therefore entitled to annual leave, long service leave as well as SG payments.
Following the Federal Court finding that Dr Moffet was not a common law employee (and therefore not entitled to leave entitlements) but that he was an employee under s. 12(3) for SG purposes, cross appeals were made by both parties to the Full Federal Court.
The Full Federal Court rejected both appeals.
In evaluating the application of s. 12(3) to Dr Moffet, the Full Federal Court made the following points:
- section 12(3) requires that: (a) there should be a ‘contract’; (b) which is wholly or principally ‘for’ the labour of a person; and (c) that the person must ‘work’ under that contract;
- section 12(3) mandates an inquiry into the purpose of the contract from the perspective of the person obtaining the benefit of the labour (i.e. the quasi-employer);
- the question of what the Services Agreement (so far as (a) is concerned) was ‘for’ from Dental Corporation’s perspective was to be determined by reference to its terms;
- the Services Agreement procured for Dental Corporation two sets of benefits. One related to Dr Moffet’s personal services as a dentist and practice manager etc. The Full Court regarded these services were ‘for labour’. The other benefit was Dr Moffet’s promise that the practice would achieve a minimum cash flow. The Full Court considered whether the minimum cash flow promise meant that the labour component could not predominate, but ultimately concluded that the two benefits could not be disentangled. For that reason, it was found that the Services Agreement (from Dental Corporation’s perspective) was wholly or substantially ‘for’ the labour of Dr Moffet.
What is potentially surprising about the Full Court’s decision is that in coming to its conclusion that Dr Moffet was an employee of Dental Corporation under s. 12(3) no consideration was given to whether Dr Moffet was paid to achieve a result (‘the results test’) . The reason for this is unclear – potentially it was because the test was not relevant based on the fact pattern of the case. However, it raises a query regarding whether taking the aforementioned interpretation of the Commissioner’s comments in SGR 2005/1 is still permissible and acceptable, or whether a broader interpretation is required. In particular, will the Commissioner seek to rely on this non-tax case in its interactions with taxpayer going forward (notwithstanding the fact he was not a party to the case)?
The author notes that Dental Corporation has sought special leave to appeal this matter to the High Court.
The MWWD case
The applicant in the MWWD decision was a company that provides repair and maintenance services to businesses operating a particular type of machinery. The individual engaged in this case was one of the applicant’s service technicians who was described as an independent contractor. The terms of the contract did not prevent the individual from working on his own account (and he did so in some cases). The contractual terms also contemplated the individual having employees of his own or using sub-contractors subject to the company’s consent (although he ultimately did not do so). Evidence made clear that the individual had a lot of control over his working day: he was free to perform the work he undertook anytime, anywhere with minimal supervision and without detailed direction. The individual invoiced the company for the work when it was completed and was paid in respect of the invoiced work based on agreed rates for defined services. The applicant believed the individual to be an individual contractor and therefore had not make any SG contributions in respect of the individual. The Commissioner argued that the contract was principally for the individual’s labour primarily because the individual performed all of the contracted work himself and did not delegate or engaged sub-contractors. Accordingly, the Commissioner assessed the applicant as being liable to pay SG, to which the applicant objected to no avail. Upon reviewing the matter, the Tribunal held that the individual engaged was not an employee of the applicant under common law. The Tribunal also concluded that the individual engaged was not an employee within the meaning of s. 12(3) on the grounds that the contract made it clear that he had the right to delegate performance of the work, notwithstanding that he did not do so.
In evaluating the application of s.12(3) the Tribunal relied on the reasoning in Neale v Atlas Products (Vic) Pty Ltd [1955] HCA 18;(1955) 94 CLR 419, as follows:
if a contract leaves a contractor free to do the work himself or to employ other persons to carry out the work the contractual remuneration paid is not payment made wholly or at all for the labour of the person to whom the payments are made…
The MWWD decision suggests that s. 12(3) can be interpreted based on a narrow view. That is, so long as the contractual work was delegable, the contract is not wholly or principally for labour of the engaged person.
Nonetheless, the author notes that the fact pattern in the MWWD case gave an overall impression that the contractual relationship as a whole supports it being a ‘result-based’ contract. This is suggestive that all of the above characteristics in SGR 2005/1 must be present in an arrangement in order for a contract to be one that is wholly or principally for the labour of the person engaged.
Takeaways from the cases and the risks of getting it wrong
The two cases considered above highlight that the engagement of an ‘independent’ contractor does not necessarily preclude the principal from being liable for SG payments where the contract is wholly or principally for their labour. As a result the terms of many independent contractor relationships will need to be carefully reviewed and reconsidered to determine what risks businesses may face, particularly in relation to the SG charge (‘SGC’).
For business who have failed to pay SG, the SGC will be an unwelcome consequence. The SGC is calculated as the SG shortfall, plus interest and administration fee as well as penalties of up to 200% of the SG shortfall. SGC is not tax deductible. The SG shortfall for a contract that is covered by section 12(3) is determined by reference to the labour component of the contract and could be as much as the whole of the contract amount (if the contract fails to clearly express the labour and non-labour components).
The author notes that where the individual performs the contractual work for another party through an interposed entity such as a company or a trust, the Commissioner’s general view (expressed in SGR 2005/1) is that there is no employer/employee relationship between the individual and the other party either at common law or under the extended definitions of employee for SGAA purposes. This is because the company or trust (not the individual) is the party who entered into the agreement rather than the individual. However, the individual may be the employee of the intermediary company or trust, depending on the terms of the arrangement.
Despite the Commissioner’s general view, in the author’s opinion, it is necessary to keep in mind that having a company or a trust as the engaged party to the contract on its own may not be sufficient to take an independent contractor outside the scope of section 12(3). If the underlying reality of the relationship is between the key individual and the principal the risk of section 12(3) applying cannot be discounted. The economic reality of the transaction including all evidence thereof must support a bona-fide contractual arrangement that is result based.
The author also notes that whilst incorporation may be a solution to overcome SG risks faced by organisations who rely on independent contractors as part of their workforce, such arrangements may, in certain circumstances, still be within the scope of payroll tax (‘PRT’) or workers compensation regimes. For example, the ‘relevant contract’ provisions of the PRT Act of various jurisdictions seek to tax payments to bona-fide contractors who predominately provide services and work exclusively or primarily for one principal in a financial year, regardless of whether the person engaged performs the contractual work for another party through an interposed entity. In light of the outcome of the ‘Optical Superstore’ litigation, the scope of the relevant contract provisions is now far broader and has the potential to capture service entity arrangements that otherwise would have been excluded prior to that case. The Optical Superstore litigation and its implication was addressed in our previous article.
Where to from here?
The recent focus on the status of ‘independent contractors’ for various aspects of Federal and State taxation laws highlights the risks and costs associated with organisations getting the status of their worker wrong. The ramifications may also extend to other fields of employment law such as annual and long service leave entitlements under the Fair Work, PRT etc. Accordingly., it is important that organisations understand the inherent risks and develop a framework to minimise those risks for existing and future arrangements entered into with bona-fide contractors (whether or not they are incorporated). As relationships change, it may also be necessary to review the terms of the relationship to ensure the status of the worker has not changed.
