Court case clarifies application of SG to contractors

The decision, which was handed down late last week, is important for businesses that engage individuals where the payment is wholly or principally for that person’s labour, said DBA Lawyers director Daniel Butler.

The case involved two truck drivers who previously drove delivery trucks for ZG Lighting Pty Ltd and its related companies or predecessors in business for nearly 30 years.

The drivers commenced proceedings against ZG claiming they were employees of ZG for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act). 

In the first appeal decision in 2020, the Federal Court held that Mr Jamsek and Mr Whitby were employees of ZG within the ordinary meaning of that term.

The court, in the first appeal decision, did not consider whether the expanded meaning of employee in s 12(3) applied.  

On appeal to the High Court, the High Court allowed ZG’s appeal, holding that they were not employees within the ordinary meaning of that term and remitted the matter back to the Court to determine whether Mr Jamsek and Mr Whitby were ZG’s employees within the expanded meaning in s 12(3).  

In the second appeal hearing handed down last week, the Federal Court examined whether section 12(3) of the  SGA Act applied to the drivers.

Section 12 (3) of the  SGA Act 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.

The court held that the primary judge was correct to find that Mr Jamsek and Mr Whitby were not employees within the meaning of s 12(3).

It confirmed the decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet) which held that s 12(3) has three elements, namely:

• That there should be a contract;
• Which is wholly or principally for the labour of a person; and
• That the person must work under that contract.

“The Court noted that the first element of s 12(3), (i.e. that there should be a “contract”) requires a bilateral exchange of promises of labour and payment between two sides of the contract,” said Mr Butler.

“On one side of the contract, a promise to provide labour and on the other side of the contract, a promise to make payment. Thus, the first element was established.”

The Commissioner of Taxation, which was joined as party in the appeal, submitted that s 12(3) only has application where the putative employee is an identified natural person who is a party to the contract in their individual capacity, rather than in any other capacity such as a partner or trustee of a personal service trust.

“Mr Jamsek and Mr Whitby were each in partnership with their respective wife,” said Mr Butler.

In respect of the second element of s 12(3), regarding the labour of a person, the court stated that section 12(3) is not satisfied where a contract is properly characterised as being for the provision of a result and not for labour.

It also stated that a contract that leaves the contractor free to do the work himself or to employ other persons to carry it out is not “wholly or principally for the labour of the person”.

The Court confirmed the primary judge’s finding that the contracts between the drivers and ZG were not wholly or principally for the labour of the drivers based on the reasons discussed below.

In addition, the contracts  required the partnerships to deliver goods subject to the company’s reasonable directions as to what carriage was to be undertaken.

The fee structure under the contracts provided for payment based on hours worked, rather than items delivered, and an agreed 45 hour working week, with both parties accepting that the actual hours may vary due to workload fluctuations.

“Remuneration by the hour points against the contracts being characterised as stipulating a given result,” the court said.

“In addition, the contracts provided for payment for nine hours each working day, even though it was possible that less work would be required in a day. This is inconsistent with the contracts being for a result.”

The court also noted that the provision of the delivery service under the contracts required the use of a substantial capital asset, the trucks, for which the partnerships were wholly responsible.

The partnerships took on all costs and risks associated with the trucks, and as part of this service, the partnerships were also responsible for maintaining insurance.

The partnerships were also able to delegate the work to a substitute driver with agreement from ZG.

The court highlighted that the benefit received by ZG under the contracts was not divided into two separate components, one being labour to drive and the other being the use of a truck.

“What ZG received was a single integrated benefit being a delivery service to be carried out by the partnership, using the partnership’s resources at the partnership’s risk and fully insured at the partnership expense,” the court said.

“As Justices Gageler and Gleeson observed ‘what was contracted for, provided, and paid for, under the contract was the carriage of goods by means of a truck, not the truck and separately Mr Jamsek as individual to drive it’.”

Moreover, the court  stated that the benefit received by ZG was a delivery service which included a labour component which was not the principal benefit.

Mr Butler said the case has important implications for businesses that engage individuals where the payment is wholly or principally for that person’s labour.

“Broadly, if the person engaged is not an individual such as a partner in a partnership or trustee of a trust, SG should not apply,” he said.

“Furthermore, where the person is an independent contractor that is paid to produce a result or where they can substitute someone else to provide the service, then SG is unlikely to apply.”

One aspect that wasn’t addressed in this case was how s 12(3) of the SGA Act would apply where there’s an individual acting as an incorporated entity.

“I think logic and reasoning in this judgement would suggest that it would also not extend to a proper independent contractor who is incorporated,” said Mr Butler.

“I’ve always strongly recommended for that where businesses are engaging a contractor, they should only engage an incorporated contractor. It’s very, very risky to engage an individual.”

Following the High Court decisions Personnel Contracting and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, the ATO has released a draft practical compliance guideline on classifying workers as employees or independent contractors.

PCG 2022/D5 reflects the ATO’s compliance approach in this area.

In light of this recent decision, Mr Butler said the ATO may also need to review SGR 2005/1.

“The other important thing to be aware of with contractors is that there is no single test. You've got to look at the employee versus contract  distinction in respect to each specific piece of legislation. You need to look at PAYG, payroll tax and superannuation guarantee all separately,” said Mr Butler.

“It’s a real hornet’s nest, we've got one of the most complex industrial relations systems in the world. All this complexity with legislation is very difficult for employers to get it right. Unfortunately, the penalties for getting these things wrong are crushing.

“Within the PCG, the ATO is expecting a fairly high threshold from businesses and principals to have legal advice supporting their position with a comprehensive written agreement. That is very costly to implement.”