The Federal Court’s recent judgement in JMC Pty Limited v Commissioner of Taxation [2022] FCA 750 (JMC) is an important decision on the employee / independent contractor distinction both for the higher education sector and more generally for its application of the recent High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel) and ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek).
The Personnel and Jamsek decisions and some recent applications of them have been previously discussed here.
Essentially, the judgements of the majority of the justices in these two cases moved the goal posts or, as all but two justices (Gageler and Gleeson JJ) would have it, affirmed where the goal posts have always been, or should have always been.
The High Court ruled that, when applying the long established ‘multifactorial test’ to determine whether a worker is an employee or an independent contractor, the various indicia of employment are only relevant to the extent that the terms of any written contract give effect to them (unless the contract is a sham or has been varied by the subsequent conduct of the parties). It is only where the terms of a contract are oral or ambiguous that the court can apply the multifactorial test against the practical reality of the relationship and the manner of performance of the contract.
Along with other decisions post Personnel and Jamsek, JMC is a further demonstration of the difficulties sometimes associated with properly classifying workers and the fallout following a wrong call.
JMC – the background
JMC, an Australian university that provides higher education programmes had engaged Mr Harrison, a qualified sound engineer to provide ‘teaching services,’ to deliver lectures and mark student assessments at its Melbourne campus.
The case was an appeal against a decision of the Commissioner of Taxation (Commissioner) relating to JMC’s liability to make superannuation contributions for Mr Harrison. The ultimate issue before the Court was whether, in this context, Mr Harrison was an employee or independent contractor.
The Commissioner had found that Mr Harrison was an employee for whom JMC was liable to make superannuation contributions, under the ordinary meaning of the term and the extended definition under section 12(3) of the Superannuation Guarantee (Assessment) Act 1992 (Cth) (SGAA) for the periods 1 April 2013 to 30 June 2016.
What is interesting is that at the time the trial took place, Personnel and Jamsek had not yet been granted special leave to appeal in the High Court. It was only after the trial had concluded and Wigney J had reserved his judgement that Personnel and Jamsek were heard and decided by the High Court.
A lot of the evidence led during the JMC trial was therefore focused on work practices and how the parties conducted themselves during the period of engagement. In light of the High Court decisions, such evidence was no longer of particular relevance as the terms and conditions upon which Mr Harrison was engaged were recorded wholly in a series of written contracts titled “Memoranda of Agreement” (MOAs) and emails.
His Honour noted that the only evidence of that nature (concerning work practices and party dealings) to which regard could be had was evidence of objective, mutually known circumstances at the time of entry into the contracts which might assist in construing them, or evidence which was capable of establishing that the contracts had been varied, or that certain rights under the contract were subject to estoppel.
Terms and conditions of the MOAs
Pursuant to the MOAs Mr Harrison was:
- ‘labelled’ as “the Services provider” and acknowledged and accepted that his relationship with JMC was as a contractor;
- paid an hourly rate for delivering lectures and a separate hourly rate for marking assessments;
- required to personally provide the teaching services;
- required to submit invoices that specified the teaching services he provided which were to be accompanied by time sheets and signed lesson plans;
- permitted to sub-contract or assign the obligation to provide teaching services subject to JMC providing prior written consent and the proposed sub-contractor or assignee having the necessary qualifications, experience and working with children checks (as required by the Tertiary Education Quality and Standards Agency Act 2011 (Cth) (TESQA));
- provided with all the necessary equipment and infrastructure required to teach the lectures (although he could use his own equipment if he chose to);
- required to provide his teaching services at the ‘standard required’ and in a manner necessary to produce learning outcomes consistent with TESQA;
- prohibited from divulging or applying to his own use any confidential information concerning JMS’s business, financial arrangements, intellectual property or position or any other dealings, transactions or affairs of the JMC business (JMC had no similar obligation that prohibited them from using confidential information concerning Mr Harrison);
- responsible for maintaining his own worker’s compensation and income protection insurance;
- permitted to terminate the contract upon giving two weeks’ notice.
JMC had the right:
- of control over the time and place Mr Harrison was required to provide his teaching services (although at times there may have been some scope to rearrange some class times before the beginning of the trimester, he did not have the contractual right to vary the timetable);
- to monitor and review Mr Harrison’s performance (as required by TESQA) by virtue of;
a. the requirement for Mr Harrison to repeat the provision of services without additional payment if the managing academic officer was not satisfied with his provision of a particular teaching service, considered it was incomplete or did not adequately deal with an aspect of the teaching requirements;
b. the requirement to submit signed weekly lesson plans declaring that the information contained within them was a true and accurate record of the content delivered in lessons;
- to ownership of any intellectual property brought into existence by Mr Harrison in providing his services to JMC;
- to make visual and sound recordings of Mr Harrison while providing his teaching services (with the intellectual property in those recordings also vesting with JMC); and
- to terminate the contract upon giving two weeks’ notice.
Judgement – employer/employee relationship
The issue of whether Mr Harrison was an employee having regard to common law principles was finely balanced. While there were terms in the MOAs that suggested Mr Harrison may have provided teaching services to JMC as an independent contractor, a close analysis of the totality of the legal rights and obligations provided for in the contracts between the parties ultimately supported the conclusion that the relationship was one of employer and employee both under the ordinary meaning and extended definition under s 12(3) SGAA.
Employee under the ordinary meaning (common law principles)
In reaching this conclusion Wigney J noted the most significant consideration militating towards that characterisation as an employee, was JMC’s rights under the MOAs to effectively control Mr Harrison’s provision of the teaching services so it could meet legislative standards in relation to academic accreditation and oversight of the courses.
Another indicia given significant weight was Mr Harrison’s contractual right to sub-contract or assign the teaching services, which was limited, narrow in scope and unlikely to be exercisable. He could not unilaterally exercise that right because it was subject to JMC’s effectively unfettered discretion to refuse to consent to any sub-contract or assignment. That limited right was not capable of outweighing all of the other considerations, which weighed in favour of the characterisation of the contracts as one of employment.
Mr Harrison was also found to be engaged to work as part of JMC’s business and was effectively integrated into that business (also indicators of employment), rather than carrying on his own business (as a contractor would do).
Given the above, very little weight was given to Mr Harrison’s label as a contractor, the obligation for him to maintain workers compensation, or the parties right to terminate the contract at short notice. Justice Wigney considered that in the circumstances these indicia were merely reflective of JMC’s view that he was a contractor and nothing more.
Employee under the extended definition
Even if a worker under the common law principles is considered a contractor, Section 12(3) SGAA provides that a worker will be an employee (for the purposes of the SGAA) if the person works under a contract that is wholly or principally for the labour of the person.
Pursuant to the Commissioner’s guidance in Superannuation Guarantee Ruling 2005/1 (which is currently being reviewed as a result of the High Court decisions), a contract will be wholly or principally for labour where the worker:
- is renumerated wholly or principally for their labour and skills;
- does not have a right of delegation; and
- is paid for their labour and not to achieve a result.
Considering the above, Justice Wigney found that:
- Mr Harrison was paid principally (not wholly) at an hourly rate for his labour, being the delivery of lectures and marked assessments;
- although Mr Harrison had very limited rights to sub-contract or assign, this did not preclude a finding that the contracts were principally for labour as the contracts properly construed required him to personally provide his labour in order to provide the teaching service; and
- he was not paid to achieve a result.
Key takeaways
This case highlights the occasional difficulty in determining the characterisation of the relationship between two parties, even where the rights and obligations are wholly in writing. While Wigney J makes it clear (citing Personnel and Jamsek) that the indicia should not be considered as a checklist exercise, it is nonetheless useful to analyse the contractual rights and obligations having regard to the indicia as some degree of uncertainty is unavoidable, particularly in the case of many modern-day work or service contracts.
Going forward, parties should review their written agreements to ensure that the terms are clearly expressed and consider all relevant indicia of the multi-factorial test.
Incorrect characterisation of a relationship may mean that you have failed to comply with your:
- superannuation guarantee obligations;
- Pay As You Go withholding obligations;
- workers’ compensation insurance requirements;
- industrial obligations applicable to employees in relation to such things as payment of minimum rates of pay and accrual and payment for statutory leave entitlements.
Failure to comply with these obligations may not only result in the obligation to make such payments, but also expose you to significant penalties under tax and employment laws.
Superannuation note
Unlike with other tax liabilities, there is no time limitation to the period of review for which the Commissioner can raise assessments for superannuation guarantee charges (provided no assessments for that period have previously been issued). For example, for income tax the period of review is limited to four years for companies and trusts (two years for individuals).
Not only does the Commissioner have power to issue Notices of Assessments requiring you to pay outstanding superannuation amounts, but you may also be levied for penalties, interest and charges up to 200% of the outstanding amount and none of the remedial amounts paid will be tax deductible. If a company does not pay their superannuation guarantee obligations by the due date, Directors can be issued with a Director Penalty Notice for a penalty equal to the unpaid amount.
It is therefore vital that entities ensure they have correctly categorised their workers as independent contractors as the ramifications with respect to unpaid superannuation contributions alone can be significant.
For further information or assistance please contact our Tax or Workplace and Employment Law teams.