It has become increasingly difficult for employers to be certain of their superannuation guarantee (“SG”) obligations. The number of recent Tribunal and Federal case laws dealing with the status of whether a person is an employee or independent contractor for the purposes of the Superannuation Guarantee (Administration) Act 1992 (“SGAA”) and their outcomes underscore the increasing risk of employers being liable for historical unpaid super if the person engaged is found to be a deemed employee under the expanded meaning of that term.
The definition of employee for the purposes of the SGAA is wider than its ordinary meaning and includes workers contracted wholly or principally for their labour notwithstanding the fact that they are independent contractors.
Whilst it may have been agreed contractually between the parties that the contractor will be responsible for their own superannuation contribution, the SG scheme has no regard to such arrangements. If a contractor is found to be an employee under the expanded definition in section 12(3) of SGAA, the quasi-employer will be required to pay super guarantee charge (“SGC”) which is not tax deductible. Directors may also be personally exposed for any SGC that remains unpaid under the director penalty notice provisions.
The latest case of The Trustee For Virdis Family Trust t/a Rickard Heating Pty Ltd and Commissioner of Taxation (Taxation)  AATA 3 (5 January 2022) (“Rickard”) is another example of a contractor found to be an employee under section 12(3) of the SGAA. Additionally, the case also affirms the test applied in Dental Corporation Pty Ltd v Moffet  FCAFC 118 (16 July 2020) (“Moffet”) as to what is required to meet the expanded definition – that being:
- there should be a contract (whether oral or written);
- which is wholly or principally for the labour of a person; and
- that person must work under that contract.
The Tribunal concluded that the taxpayer, Rickard was liable for SGC for the putative employee for each of the quarters from 1 October 2013 to 31 March 2018.
The key elements of the Rickard case were:
- Rickard conducted a business selling and installing cooling systems and had a number of employees that were plumbers and apprentices;
- Mr Pirie was engaged as a contractor plumber and was paid based on an hourly rate;
- Invoices rendered by Mr. Pirie were only for hours worked and not for anything else;
- Pirie was responsible for his own superannuation contributions;
- Pirie was told where he was required to work and if he was unable to attend work, he would notify Rickard of his absence;
- Pirie did not arrange for a replacement to do his work or delegate his work to someone else;
- There was no expressed or implied power of delegation and Mr. Pirie’s conduct over a number of years strongly suggest that there was no ability to delegate the work he was to do.
S. 12(3) – ‘ … work under a contract that is wholly or principally for the labour of the person’
In reaching the decision, the Tribunal considered the test applied in the Moffett case to determine whether Mr. Pirie was an employee under section 12(3) of the SGAA and noted the following points:
- In regard to the first element – there should be a contract, it was found that there was a contract between Mr. Pirie and Rickard irrespective of whether the contract was oral or written (Mr. Pirie was paid for performing work for the stated hourly rate);
- In regard to the second element – wholly and principally for the person’s labour, this mandates an inquiry as to the purpose of the contract from the perspective of the quasi-employer (the person obtaining the benefit of the labour). The benefit that Rickard received in return for the agreed hourly rate was Mr. Pirie working, providing his labour. If consumables were provided by Mr. Pirie, the main or substantial object of the contract was to secure Mr. Pirie’s labour. If Mr. Pirie were not providing his labour, there would have been no contract with him. It was also not relevant whether Mr. Pirie conducted his own business or not when Mr. Pirie was contracted to give Rickard only his labour;
- In regard to the third element – the person must work under the contract, there was no dispute that Mr. Pirie did work under the contract (whether oral or written) over the relevant period of issue.
As Mr. Pirie was determined to be an employee because of section 12(3) of SGAA, it was not necessary for the Tribunal to determine whether there was an employment relationship under common law.
Observations and implications
The Rickard case confirms that in evaluating whether a contractor is a deemed employee under s.12(3) SGAA, the purpose of the contract must be examined from the perspective of the person obtaining the benefit of the labour.
Where the person is contractually required to personally perform the work, this is a strong indication that the person is a deemed employee. This raises the question as to whether the outcome would be any different if Mr. Pirie had the capacity to engage others to perform the work he was contracted to do. The author notes that the Commissioner has inferred in SGR 2005/1 that having the capacity to delegate (whether or not that right is exercised) is indicative that the person does not work under a contract wholly or principally for their labour. However, having regard to the Tribunal’s observation in the Rickard case, it is the author’s view that in order to distinguish between a contract for labour and a contract to produce a result, the right of delegation needs to be acted upon other than in minor respect. So the right of delegation should be a real and available choice, rather than merely a theoretical possibility.
Thus for businesses that engage sole trader contractors (i.e., not contractors supplying services through an intermediary entity) the Rickard case is another reminder to review existing arrangements to assess whether any are principally for a person’s labour.