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Employee or Independent Contractor? Recent case law on whether super guarantee contribution is required to be paid

Where an individual worker is engaged to work as a contractor rather than an employee, Super Guarantee (SG) contributions are typically not required to be paid on remuneration paid to them.

Generally the matter is determined by a classification of the worker as an employee or contractor. However, given that the legislation in relation to SG provides its own criteria for when SG contributions must be made, the criteria of which do not exactly mirror other classifications of an employee vs a contractor, the issue must be considered carefully.

Recent case law establishes that a contractor can still be entitled to SG in certain circumstances.

This article will briefly explain when SG may be required to be paid in respect of a contractor and will outline the facts of the relevant case law.

Ari Armstrong, Maddocks Lawyers

The starting point - Legislation and Tax Rulings

As a starting point, it is not determinative for an employer's contract to simply state whether an individual worker is an employee or a contractor. Rather, the answer to whether a worker is an employee, or a contractor will be a question of fact as to the nature of the work engagement. As is stated in Superannuation Guarantee Ruling SGR 2005/1 (SGR 2005/1), the "totality of the relationship between the parties must be considered".1

Section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) provides that:

  • "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."

So is this a different test from the test to determine whether someone is an employee or contractor?

Yes. This legislative definition effectively widens the net as to who can be deemed an employee (as opposed to the narrower common law definition) for SG purposes.

Factors such as the level of control a worker has over their enterprise,2 whether work can be delegated or subcontracted by the worker, and the level of risk the worker bears arising out of injury or defect in the performance of their role are all well-known factors in determining whether a worker is a contractor or an employee, who is entitled to SG contributions.

This article looks at 3 interesting cases:

  • Dental Corporation found that even though the worker did not fit the common law definition of an employee, the business still had to pay SG contributions
  • Jamsek - found that even though the worker was a registered partnership, working under a contractor agreement with the relevant business, the worker was still an employee in respect of whom SG payments had to be paid
  • MWWD - found that the worker was right on the border between employee and contractor, but ultimately the AT found the correct classification was that of a contractor in respect of whom no SG payments were required to be made.

Recent case law

Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Dental Corporation)

Dental Corporation demonstrates that a reliance on a worker to run the business will tilt the classification of the relationship towards that of an employer-employee for the purposes of SG law.

Dental Corporation concerned a dental practice in Parramatta which was formerly owned by Dr Moffet's family trust but was bought out by Dental Corporation Pty Ltd in 2007. Dr Moffet continued to work as a dentist at the dental practice, as he was obliged to do so under a services agreement, until he resigned in 2014. Dr Moffet claimed to be an employee of the dental practice during that seven year period from 2007 to 2014.

The full Federal Court held that Dr Moffet was not an employee at common law. Dr Moffet determined his days of work and did not seek permission to take holidays.

However, the Court also found that Dr Moffet had made a somewhat amorphous promise to work for the business. The reality was that, without the involvement of Dr Moffet in the practice as owned by the (unrelated) Dental Corporation, would have generated no significant revenue, meant that Dental Corporation was wholly reliant on Dr Moffet working for them - that is, the predominant feature of the agreement was Dr Moffet's labour. Accordingly, although he did not satisfy the definition of an employee at common law, Dr Moffet's contract with Dental Corporation was therefore "wholly... for the labour of (Dr Moffet), and thus he was an employee within the expanded meaning in section 12(3) of the SGAA.

Had the contract stipulated that Dr Moffet was engaged to achieve a separate labour-related objective (such as number of patients or hours of work), rather than simply to work in order to generate cash flow for the practice, the conclusion may have been different.

Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 119 (Jamsek)

Jamsek demonstrates that where a worker has no capacity to generate his/her own goodwill outside of the relationship with the employer, it will tilt the scales in favour of the worker being an employee.

The case concerned two truck drivers, Mr Jamsek and Mr Whitby, who had been continually engaged by the same company to drive delivery trucks for nearly 40 years. Mr Jamsek had set up a partnership with his wife, and the income he derived from his truck driving for the company was declared as partnership income. The partnership paid all upkeep expenses relating to the trucks.

Perram J in Jamsek explained that "whether one is working in one's own business does not necessarily entail... that one cannot be an employee". In other words, the question is not whether the person has their own distinct business, but whether the person is an employee. Therefore proof that one operates their own business, does not necessarily preclude them from being an employee, even at common law.

Relevantly, Mr Jamsek had no capacity to generate goodwill through his work and thus the Court ultimately did not find that he had his own distinct business from the employer.

The Court held in favour of Mr Jamsek and Mr Whitby being employees, who were therefore entitled to be paid SG contributions.

MWWD and Commissioner of Taxation (Taxation) [2020] AATA 4169 (MWWD)

MWWD concerned a company which provided repairs and maintenance to machinery and one of its service technicians (who was referred to as 'Mr Smith'). The company did not make superannuating contributions in respect of Mr Smith during the four years he worked for them.

At first instance, the Commissioner of Taxation had concluded that the company was obliged to pay SG contributions for Mr Smith. The Administrative Appeals Tribunal of Australia overturned this, ruling that Mr Smith was not in fact an employee of the company: accordingly there was no obligation to make SG payments.

In coming to this decision, the following indicia were considered probative:

  • the contract which governed the relationship was described as a 'contractor's agreement' and expressly stated "the Contractor's relationship with the Company will be that of independent contractor" with no right or authority for one party to bind the other;
  • Mr Smith assumed personal liability for any loss or damage arising out of his work defects - which clearly weighed against the relationship being termed a contractor relationship; and
  • despite the fact that Mr Smith did not delegate or sub-contract work, the contract clearly stipulated he had the right to do so. It was therefore, to use the words of section 12(3) of the SGAA not "wholly... for the labour of (Mr Smith)".

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on HR topics here.

Order related document packages

  1. SGR 2005/1 at paragraph 9.
  2. See Hollis v Vabu (2001) 207 CLR 21 at 41.

Lawyer in Profile

Leigh Baring
Leigh Baring
+61 3 9258 3673

Qualifications: LLB (Hons), BEc (Hons), Monash University

Leigh is a Partner in Maddocks Tax and Structuring team. Leigh has extensive experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.

Leigh regularly provides advice on:

  • structuring of businesses and transactions,
  • mergers and acquisitions,
  • corporate reorganisations and distributions,
  • sale of businesses,
  • demergers,
  • capital raisings,
  • joint ventures and property developments,
  • international tax (both inbound and outbound), and
  • succession planning and liquidations.

His advice covers both direct and indirect tax considerations.

Throughout his career, Leigh has been at the forefront in developing tax-effective corporate, trust and superannuation structures.

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