This is part 9 of our series of ‘employee versus contractor’ articles. Part 9 focuses on the ATO’s recent decision impact statement (DIS) on the Full Federal Court (Full Court) in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek). The other articles (parts 1-8) are linked under the Related Articles heading below.
Background
By way of background, we have extracted some paragraphs below concerning the facts of Jamsek from our article ‘Employee or contractor –– High Court focus on contract v. multi-factors –– Part 2’:
Mr Jamsek and Mr Whitby were initially employed directly by ZG Operations from 1977. However, in 1985/86 the company negotiated a new arrangement with each driver and their wife as separate partnerships. Each partnership purchased a truck from the company and thereafter maintained their own equipment. Each partnership was paid for the delivery of goods via an invoice. Each driver argued they were placed under pressure to enter into these arrangements.
Each truck driver on departure from the company in 2017 claimed they should be paid their ‘employee entitlements’ that they had missed out on, including annual leave and Superannuation Guarantee (SG) contributions. (This is not an uncommon claim for a departing purported ‘contractor’ where the person may consider that they missed out on these entitlements — thus, employers need to be mindful of this risk when considering the apparent advantages of hiring a contractor, in contrast to an employee.)
The primary judge of the Federal Court concluded that the drivers were independent contractors. However, the Full Court overturned this decision and held that, having regard to the “substance and reality” of the relationship, they were employees.
The High Court unanimously held that Mr Jamsek and Mr Whitby were not employees [within the ordinary meaning of that term].
The High Court subsequently remitted back to the Full Court the issue regarding whether the drivers fell within the meaning of employee under s 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA). Relevantly, s 12(1) of the SGAA states that the terms ‘employee’ and ‘employer’ have their ordinary meanings. However, s 12(3) provides for an expanded definition of an employee for SG purposes, namely:
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.
Full Court decision
The Full Court unanimously held that that Mr Jamsek and Mr Whitby did not fall within the expanded definition of ‘employee’ under s 12(3).
Importantly, the Court concluded that s 12(3) only applies if the party providing the labour or services is a natural person who entered the contract in their individual capacity and not in any other capacity (eg, as a partner in a partnership).
The Court also found that Mr Jamsek and Mr Whitby failed to adduce sufficient evidence to establish that they fell within the scope of s 12(3).
ATO view
The ATO highlighted several aspects of s 12(3) that were clarified by the Full Court, including:
- The application of s 12(3) requires an analysis of the content of a bilateral exchange of promises (regardless of the number of parties on each side of the contract).
- The SG regime cannot be circumvented by forming a contract which names more than two parties.
- Only natural persons entering contracts in such capacity can be deemed an employee for the purposes of s 12(3). Further s 72(1) of the SGAA does not operate to deem a partnership or other entity to be a natural person for the purposes of s 12(3).
The ATO also reiterated the considerations that apply in determining whether a contract is for labour with regard to the terms of the relevant contract, including:
- A contract designed for the provision of a result is not a contract for labour.
- Remuneration calculated on a per hour basis points against a contract being for the provision of a result, while remuneration calculated with reference to a number of hours worked per day is inconsistent with a contract being for a result.
- A substantial capital asset being required to provide services points towards the contract not being wholly or principally for labour.
- The existence of a right to delegate under a contract means the performance of the contract is not personal to the individual engaged to provide the service (ie, the contract will be for the provision of a service, not for the labour of the individual). Refer to part 8 in the Related Articles below for more information on the right to delegate.
- It may not be appropriate to divide the contract into components when determining whether the contract is wholly or principally for labour where a contract is for a single integrated benefit (ie, a delivery service).
The DIS also provides guidance on whether an analysis of a contract should be quantitative or qualitative. Broadly, the Full Court found that quantitative evidence from Mr Jamsek and Mr Whitby regarding the market value of components of the delivery service was required to show that the contract was at least principally for labour. However, the Commissioner has clarified in the DIS that there will be instances where a qualitative analysis of components of a service should be used. However, no further guidance was provided as to circumstances that would warrant a qualitative review.
Conclusions
We recommend those that engage contractors should ensure they have comprehensive written contracts that are appropriately worded to reflect the latest guidance from the ATO. Further, the DIS notes that the Commissioner is considering whether changes are required to a range of ATO material (including SGR 2005/1, SGR 2005/2, SGR 2009/1 and ATO ID 2014/28). Therefore, individuals and entities seeking to rely on these ATO materials should be mindful that they are subject to potential change.
There is considerable complexity in ensuring that a true contractor relationship exists especially after recent changes to the Fair Work Act 2009 (Cth) (FWA) which, in essence, seeks to reverse the High Court decisions that focus on the primacy of the contract. (Refer to part 7 in the Related Articles below for more detail on the FWA changes.)
Naturally, if requested, DBA Lawyers would be pleased to assist.
Related articles
- Employee or independent contractor –– PAYG & SG –– Part 1
- Employee or contractor — High Court focus on contract v. multi-factors — Part 2
- Employee or contractor – Payroll Tax considerations — Part 3
- The application of SG to contractors clarified — Part 4
- Payroll tax crackdown on medical, healthcare and similar arrangements — Part 5
- New ATO guidance on employee/contractor distinction – Part 6
- Employee or contractor – new changes to the Fair Work Act – Part 7
- Employee or contractor – SG and the right to delegate – Part 8
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice should be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler, Director ([email protected]) and Fraser Stead, Lawyer ([email protected]) DBA Lawyers
6 June 2024
