While most employers comply with the superannuation requirements for their employees, confusion still exists around the superannuation guarantee liability for independent contractors. 

Many employers operate under the assumption that independent contractors are solely responsible for their own superannuation contributions.

However, this perception is not entirely accurate.

In fact, an employer may be required to pay the superannuation guarantee on behalf of certain independent contractors.

Superannuation Guarantee

Under the Superannuation Guarantee (Administration) Act 1992 (SGAA), the terms ‘employer’ and ‘employee’ have their ordinary (i.e., common law) meaning. However, s.12 of the SGAA expands the ordinary meaning of ‘employee’ to include categories of persons who are not common law employees. 

This article will specifically be examining s.12(3) of the SGAA, which 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.” 

Where a person is not a common law employee but is an employee under s.12(3) of the SGAA because they are contracted wholly or principally for their labour, the salary or wages of the employee is defined as the labour component of the contract under s.11(1)(ba) of the SGAA.

This article explains the meaning of “wholly or principally” further below. 

When does s.12(3) apply

For s.12(3) of the SGAA to be satisfied, the case of Dental Corporation Pty Ltd v Moffett [2020] FCAFC 118 sets out three elements that must be present: 

1. there is a contract (Note: the terms of the contract may be in writing, oral, or implied. The existence of a contract can be inferred from the conduct of the parties); 
2. the contract is wholly or principally for the labour of the person; and 
3. the person must ‘work’ under that contract. 

If these three elements are met, an individual will be considered an employee under s.12(3) of the SGAA and, therefore, the employer is required to pay the superannuation guarantee.

Wholly or principally for the person’s labour

What does it mean to be contracted ‘wholly or principally’ for one’s labour? Simply put, a contract will be considered wholly or principally for labour if the contractor: 

• is remunerated wholly or principally for their personal labour (Note: an hourly, daily or weekly remuneration rate is a measure of a contractor’s labour); 
• performs the contractual work personally, and there is no right of delegation; and 
• is not paid to achieve a given result or outcome (for example, the fees under the contract are not for a fixed project fee regardless of the contractor’s labour). 

Practical Application of s.12(3)

The application of s.12(3) of the SGAA was most notably examined in the landmark case of JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76 (JMC Decision).

Background

• The JMC Decision involved JMC Pty Ltd (JMC) as the provider of higher education programs. 
• JMC engaged Mr Harrison, a qualified sound technician, to provide teaching services by delivering lectures and marking student exams in a bachelor’s degree course. 
• Mr Harrison’s short-term written contracts included a contractual right for him to subcontract or assign the teaching services he was engaged to provide to another, with JMC’s written consent. 
• JMC considered Mr Harrison an independent contractor and, on that basis, did not remit superannuation contributions. 
• The Commissioner of Taxation challenged JMC’s position and at first instance, the Court found Mr Harrison was an employee. 

Finding on appeal

• On appeal, the Full Bench of the Federal Court held that Mr Harrison was not an employee within the ordinary meaning of that term, nor was the contract ‘wholly or principally’ for the labour of Mr Harrison. 
• Due to the contractual right of Mr Harrison to subcontract his services, the Full Federal Court found that the contract was not wholly or principally for Mr Harrison’s personal labour, as the performance of the services could have been subcontracted to a third party, regardless of whether Mr Harrison exercised this right or not. 
• In handing down its decision, the Full Federal Court held that the Court at first instance had erred in concluding that Mr Harrison only had a “limited or illusory right” to subcontract his services and that it was not relevant that Mr Harrison had to seek written consent before subcontracting his services.
• Instead, the Full Federal Court held that s.12(3) requires attention to the rights under the contract and not the actual performance of the contract. 

Key Takeaways from the JMC Decision 

The JMC Decision underscores the supremacy of the written terms of the contract between the principal and the contractor. As stated above, the Full Federal Court’s reasoning hinged on whether Mr Harrison possessed the contractual right to delegate. The Court was not concerned with whether he exercised that right or whether any limitations were imposed upon it.

Lessons for Employers

1. The written terms of the contract are paramount and override the actual performance of that contract.
2. Review your current practices in relation to independent contractors to ensure you are compliant with the SGAA. 
3. Comprehensively drafted independent contractor agreements can assist you in mitigating the risks associated with the liability to pay the superannuation guarantee. 
4. Consider engaging incorporated contractors, as they are not captured by s.12(3) of the SGAA. 

Please contact WilliamsonBarwick if you need any assistance in navigating the superannuation guarantee in relation to independent contractors. We are happy to help.