What’s emerging? Full Federal Court superannuation decision in employee/contractor matter appealed to the High Court

In May 2023, the Full Federal Court handed down its judgement in JMC Pty Ltd v CoT [2023] FCAFC 76 (JMC FFC), with the decision providing important judicial guidance in respect of the application of superannuation guarantee (SG) to contractor arrangements. 

Broadly, the case dealt with a principal (JMC) who, as a provider of higher education programmes, engaged a sound engineer/technician, Mr Harrison, to provide teaching services as an independent contractor. The Commissioner of Taxation (the Commissioner) issued assessments of SG charge to JMC in relation to the individual, which were objected to and ultimately appealed to the judiciary. 

From a common law assessment perspective, the Full Court emphasised the relevance of contractual control and sub-contracting/delegation in assessing the ‘totality of relationship’. Relevantly, the Full Court reversed the primary judge (Wigney J)’s decision, which had concluded that the individual should be considered an employee under common law principles, applying the High Court decisions of ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek HC) and CFMEU v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel). 

Furthermore, the JMC FFC matter also reviewed the relevance of a right to sub-contract/delegate with respect to section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) (‘wholly or principally’ for labour). Pertinently, the primary judge (Wigney J) was part of the Full Court bench that decided Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek FFC), the pre-eminent decision on the application of section 12(3).   

This article summarises the main legal principles that led to the Court’s decision, analyses them in the context of Jamsek HC, Personnel Contracting and Jamsek FFC, and highlights the key takeaways for taxpayers. It is also worth noting that the Commissioner has sought special leave to appeal the Full Federal Court’s decision to the High Court, which has yet to be assessed at the time of writing this article. 

JMC FFC Decision - Summary 

The recent JMC FFC decision upholds the principles derived from Jamsek HC and Personnel Contracting, that the common law employee/contractor determination relies on an assessment of the ‘totality of relationship’ from the terms of the written contract. In particular, the Court’s decision focused primarily on control and sub-contracting/delegation under the contract between JMC and Mr. Harrison.

With respect to control, the key point of distinction from Wigney J’s decision arose in relation to how the teaching services were agreed to be performed. The primary judge had concluded that JMC controlled how the teaching services were to be provided, highlighting that the contractual terms stipulated JMC’s provision of suggested lesson plans and Mr. Harrison’s requirement to reference these in invoicing. By contrast, the Full Court concluded that the lesson plans were not prescriptive or mandated and, as such, Mr Harrison retained a high degree of autonomy regarding teaching style - that is, JMC could not dictate how he would teach the agreed content.

In relation to Mr. Harrison having to abide by where and when lectures would be provided, the Full Court found that these aspects of control should be considered in context. In this case, it was commercially necessary for JMC to ensure teaching services were provided at appropriate times and places. 

With respect to sub-contracting/delegation, noting that the written contract included such a right (albeit  subject to written approval of JMC), the Court opined that the primary judge had erred in concluding that the right was merely “limited or illusory”. Specifically, the Court concluded that the requirement for written approval did not amount to a sufficient limitation, so as to rob it of its legal effect. 

The Court went further to comment that the requirement of consent is often regarded as an appropriate standard to ensure legitimacy of services and to protect commercial interests. Furthermore, the question of whether Mr. Harrison had ever exercised the right to subcontract/delegate was also found to be irrelevant. The Court was explicit that it is the existence of the right that is relevant.

The Court additionally found that emails between JMC and Mr. Harrison regarding subcontracting/delegating, wherein he had noted, in advance of trimester commencement, that he would not exercise the right, was simply evidence of contract performance, rather than contractual revision.

Finally, in relation to section 12(3) of the SGAA, the Court reaffirmed the principles from Jamsek FFC, in particular, the proposition that a right to sub-contract/delegate is incompatible with being ‘for’ the ‘labour’ of Mr. Harrison. 

Key Takeaways

Following the High Court decisions, whilst there has been clarity on the primacy of the contract in undertaking the ‘totality of relationship’ analysis, the JMC FFC decision brings further clarity on the assessment of control and sub-contracting / delegation in that analysis. 

In practical terms, with respect to control, this case highlights the importance of ensuring that contracts not only stipulate which party determines what, when and where services are to be performed, but perhaps most significantly, how those services will be performed.

Further, in relation to sub-contracting/delegation, the Full Court adopted a decidedly commercial viewpoint, noting that a right to sub-contract/delegate, even where fettered (e.g. requiring written approval), may well be incompatible with a common law employment relationship (and also incompatible with the extended definition of employee under section 12(3) of the SGAA). Additionally, the Court emphasised that it was the right, rather than its practical exercising, that was key to the assessment.

Notwithstanding, businesses may want to exercise caution in relying on a sub-contracting/delegation right as being the determinative factor in any analysis, in particular, noting that the Commissioner has sought to appeal the decision to the High Court. Whilst we await the High Court’s decision as to whether special leave will be granted in this matter, a key takeaway remains that the executed contract between the parties is key in the analysis. 

As such, for businesses that engage workers as independent contractors, it is strongly recommended that template contracts relating to these engagements are reviewed to ensure that the document is comprehensively drafted with respect to the respective parties’ rights and obligations. Furthermore, there should be a focus on the governance protocols to escalate instances requiring amendment of template contracts, where necessary, to better reflect the rights and duties actually agreed between the parties.

If you have any questions regarding the JMC FFC decision, or would like to understand how this will impact you, please reach out to your PwC Employment Taxes advisor for assistance.