Should you be paying your contractors super?
Posted on July 13, 2023
Last year the High Court handed down the landmark decisions of Personnel Contracting[1] and Jamsek[2], which set out the applicable legal principles to determine whether a worker was an employee or an independent contractor. The decision of Jamsek involved two truck drivers who owned and supplied their own trucks and contracted with the principal company (ZG Operations) under a series of contracts through their partnership. The High Court held that the workers were not employees. The High Court however remitted the question of whether the workers were ‘employees’ under the deemed extended definition in the Superannuation Guarantee (Administration) Act 1992 (Cth) (Act), back to the Full Federal Court joining the Commissioner of Taxation as a party to the proceeding.
The Full Federal Court has determined that the workers were not ‘employees’ under the extended definition in the Act, confirming that the extended definition does not apply to independent contractor relationships where the worker does not contract in their personal capacity and instead uses a company, trust of service vehicle to contract with the employer.[3]
The Act
Under the Act employers are required to pay employees superannuation contributions (currently 11%). Section 12(3) of the Act says:
“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.”
This section expands the definition of ‘employee’ and requires an employer (or principal) to pay superannuation to a person who works under a contract that is wholly or principally for their labour. This section is broad and may capture many independent contractor relationships.
Decision
The Full Court applied the same three part test as set out in their previous decision of Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118. The test requires that:
- there should be a “contract”;
- the contract is wholly or principally “for” the labour of a person; and
- the person must “work” under that contract.
The Full Court found that the workers did not meet the first two criteria of the test in section 12(3) of the Act.
In considering the facts, the Full Court held that the workers contracted with ZG Operations in their capacity as partners of their respective partnerships (each partnership consisting of the worker and the worker’s wife). It was held that the section 12(3) could not apply to this relationship as the language of the provision requires the contract to be entered into by a individual in their personal capacity.
In addition, despite the workers being paid on an hourly or daily rate, the Full Court held that the contract was not wholly or principally for labour. This was because the partnership had the right to delegate the delivery tasks to substitute drivers and the contract was for the delivery of goods which required the partnership to supply their own vehicles in addition to their labour which was a significant non-labour component.
This decision is broadly consistent with the ATO’s guidance in Superannuation Guarantee Ruling (SGR 2005/1) that incorporated contractors do not fall within the ambit of the extended test of ‘employee’ under the Act. The ATO has advised that this Ruling is being reviewed in light of the two High Court decisions handed down last year.
Key Takeaways
In summary, this decision provides further clarity to employers in relation to engaging contractors and is a timely reminder for employers to consider whether their contractors fall within the extended definition of ‘employee’ under the Act. Individuals contracting through a corporate entity who are held to be a contractor will not meet the extended definition of ‘employee’ under the Act.
Please contact our workplace relations team if you require assistance.
[1] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1.
[2] ZG Operations & Anor v Jamsek & Ors [2022] HCA 2.
[3] Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48.
