EXPANDED DEFINITION OF ‘EMPLOYEE’ BUT NOT ALL IS ROSY FOR BUSINESS OWNERS
BY ANDREW GIORGI
Earlier this year the Full Federal Court handed down its decision in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (‘Jamsek’) which considered the expanded definition of ‘employee’ for superannuation guarantee purposes. Super guarantee is a minefield for business owners, given the potential for uncertainty as well as harsh interest rates and personal director liability which can apply if the business fails to make superannuation payments on time and in full.
The issue of whether a worker is an employee or a contractor of a business has been a hotly contested topic over many years, including in recent times. Jamsek is another example of recent litigation between taxpayers and the Australian Taxation Office over who is entitled to be paid superannuation. As at the date of this newsletter, the Commissioner of Taxation is seeking leave in the High Court of Australia in a similar dispute (JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76) which may yet clarify the law in this area. We will keep you informed of developments through our LinkedIn company page HERE.
In 2022, the High Court held that where a written contract between a worker and employer is comprehensive, legally effective and not a sham, the correct categorisation of the worker is to be determined by reference to that contract. In practical terms, where businesses will often prefer and purport to engage workers as contractors of their business to minimize their overheads (e.g. “go get your own ABN!”), the recent cases have shifted the balance in proving these matters in favour of the business owner by placing the written contract as the key piece of evidence.
However, the legislation which governs whether a worker is an employee of a given business for superannuation purposes is drafted more broadly than the ‘common law’ categories considered in the High Court’s recent judgments. If a person works under a contract that is “wholly or principally for the labour of the person”, that person is an employee of the other party to the contract for superannuation purposes and is due superannuation contributions from his or her employer. The recent case law may also incentivise disgruntled or merely curious workers to seek guidance from the ATO about their entitlements which may in turn lead to a review or audit for the business.
In Jamsek, the individuals involved were truck drivers who engaged with the business through partnerships they had set up with their wives. These individuals provided their own trucks and were responsible for all costs and risks associated with their vehicles, including the maintenance of insurance.
At first blush, one might have considered the drivers’ court case weak, given they supplied their own expensive trucks and had a contractual ‘right’ to delegate or employ other persons to do the deliveries.
In conclusion, the Full Federal Court held that the two individual applicants were not employees within the expanded definition of ‘employee’.
This was primarily because the employment contracts were with the individuals in their capacities as partners of their respective partnerships, not in their personal capacities. The Court also found that the fundamental problem with their case was that a large part of their contracts related to the provision of ‘functional and properly maintained delivery trucks’ which was a considerable capital commitment. This was held notwithstanding that the contracts clearly had a considerable labour component.
Business owners take note…
Business owners may think that by engaging workers through a partnership, company or trust and/or insisting they provide their own tools of trade, that they will circumvent any application of the expanded definition.
There are difficulties with such an approach:
Can’t force me - In a tightened labour market and subject to industry practicalities, forcing a requirement for a worker to contract outside of an individual capacity may be too burdensome or unpalatable to attract and retain labour.
How much equipment does the worker bring to work? In Jamsek, the capital contribution of the individuals was significant (one of the trucks was acquired for in excess of $70,000 in 1989). Contrast this against a worker who brings only a few personal tools to the job. The potential for uncertainty as to how the law is applied is high.
Heavy penalties await - if you are wrong.
Business owners will not want to get their categorisation of workers wrong. In addition to a nominal interest of 10% per annum and a general interest charge rate in excess of 10%, the ATO and corporations legislation views the assessment and collection of superannuation entitlements as a priority. Recent public guidance (and our own practical experience) demonstrates that the ATO is putting company directors on notice with the issue of Director Penalty Notices. Due to the operation of the law, these types of notices can rarely be extinguished without being paid (either by the company at first, or the director, secondly). Due to its priority nature, any meaningful superannuation liability is at considerable risk of being pursued by the ATO or any subsequently appointed insolvency practitioner.
The team at SMAILES KRAWITZ has experience in dealing with these matters, including Director Penalty Notices.
Contact us for advice specific to your circumstances on +61 6373 7756.
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