JMC Pty Ltd v Commissioner of Taxation [2022] FCA 750

TBA member Nick Dodds discusses the Federal Court's recent decision in JMC Pty Ltd v Commissioner of Taxation which considered the meaning of "employee" for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth). A PDF copy of this article is available to download below.


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Summary


In JMC Pty Ltd v Commissioner of Taxation [2022] FCA 750, the Federal Court (Wigney J) was required to determine whether a worker was an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA). That required consideration of the ordinary, common law meaning of the term “employee” for s 12(1) of the SGAA, along with the expanded definition in s 12(3).


The decision represents the first judicial consideration in a tax context of the highly publicised decisions of the High Court in CFMMEU v Personnel Contracting Pty Ltd[1] and ZG Operations Australia Pty Ltd v Jamsek[2] on the common law meaning of “employee.”


The Federal Court in this case summarised those decisions as having the effect that characterisation of a relationship at common law as being either one of employer and employee, or one involving engagement of an independent contractor, is ultimately an evaluative judgment that takes into account the totality of the parties’ contractual rights and obligations.


The exercise may not necessarily be straightforward because the parties’ contractual rights and obligations may point in different directions. The Court also acknowledged some degree of uncertainty is unavoidable, particularly in the case of many modern-day work or service contracts. In this case, however, the degree of control afforded to the taxpayer in the way the work was to be provided and carried out in combination with other factors led to the conclusion the relevant worker was an employee.


The decision is a helpful guide to Personnel Contracting and Jamsek, and well worth reading in detail given the importance of correctly characterising the relationship between a taxpayer and its workers for the purposes of superannuation and PAYG compliance.


Background


JMC Pty Ltd provided higher education in the creative industries sector. During the periods from 1 April 2013 to 30 June 2016, and 1 July 2017 to 31 March 2018, JMC engaged Mr Nicholas Harrison, a qualified sound engineer or technician, to provide it with teaching services. Those services included delivering teaching services to JMC’s students at its Melbourne campus and marking examinations and assignments.[3]


The terms upon which Mr Harrison was engaged were reduced to writing, and included:[4]

  • JMC would pay Mr Harrison an hourly rate;

  • Mr Harrison was required to submit invoices to JMC specifying the particulars of the teaching services provided and accompanied by time sheets and signed weekly lesson plans;

  • JMC, through its managing academic officer, had a degree of oversight and control over Mr Harrison, including when, how and where he was to provide the services.

Mr Harrison duly provided the services to JMC and submitted invoices to it in the relevant periods. However, JMC did not make superannuation contributions in respect of Mr Harrison,[5] and the Commissioner subsequently issued to JMC notices of assessment of superannuation guarantee charge on the basis that Mr Harrison was JMC’s employee for the purposes of the SGAA. This was because of the Commissioner’s view that Mr Harrison was either:

  • an employee within the ordinary meaning of that term, as it appears in s 12(1) of the SGAA; or

  • because he worked under contracts that were wholly or principally for his labour, falling within the expanded meaning of the term provided for in s 12(3) of the SGAA.

After its objection was disallowed, JMC appealed to the Federal Court, which was required to determine whether Mr Harrison was SMC’s employee for the purposes of the SGAA.


Decision


Ordinary Meaning


Dealing first with whether Mr Harrison was an “employee” within the ordinary meaning of the term, the Court noted the ordinary meaning of the term is its common law meaning. The case was initially conducted on the basis that determination of whether one person was employed by another at common law involved a multifactorial assessment of the totality of the relationship, and that the relationship was not to be found merely from the contractual terms, but also from the system which was operated thereunder and the work practices imposed, by reference to longstanding authority of the High Court in Stevens v Brodribb Sawmilling Co Pty Ltd[6] and Hollis v Vabu Pty Ltd.[7]


Accordingly, when the matter proceeded to trial, much of the evidence concerning work practices and how the parties conducted themselves during the relevant period was tendered and admitted without objection.


However, while judgment in the matter was reserved, the High Court decided Personnel Contracting and Jamsek, both of which concerned the employee-contractor distinction. That was significant because, in the Court’s view in this matter:[8]


[t]he judgments of the majority of the justices in those two cases moved the goalposts, or, as all but two of the justices (Gageler and Gleeson JJ) would have it, affirmed where the goalposts had always been, or should always have been seen to have been.


The Court then went on to summarise six principles from the majority judgments in Personnel Contracting and Jamsek:

  1. first, where the rights and duties of the parties are comprehensively committed to a written contract, the legal rights and obligations established by the contract are decisive of the character of the relationship, provided the validity of the contract has not been challenged as a sham, or that the terms of the contract have not been varied, waived or are subject to an estoppel;[9]

  2. second, to ascertain the relevant legal rights and obligations, the contract of employment must be construed in accordance with the established principles of contractual interpretation. Regard may be had to the circumstances surrounding the making of the contract, as well as to events and circumstances external to the contract which are objective, known to the parties at the time of contracting and which assist in identifying the purpose or object of the contract, but it is generally not legitimate to use in aid of the construction of a contract anything which the parties said or did after it was made;[10]

  3. third, the characterisation of the relationship between the parties is not affected by circumstances, facts or occurrences arising between the parties that have no bearing on their legal rights, and a wide-ranging review of the entire history of the parties’ dealings is neither necessary nor appropriate;[11]

  4. fourth, the contractual provisions that may be relevant in determining the nature of the relationship include, but are not limited to, those that deal with the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work, the provision for holidays, the deduction of income tax, the delegation of work and the right to exercise direction and control;[12]

  5. fifth, the characterisation of the relationship as one of service or employment involving an employer and employee often hinges on two considerations. The first consideration is the extent to which the putative employer has the right to control how, where and when the putative employee performs the work. The second is the extent to which the putative employee can be seen to work in his or her own business, as distinct from the business of the putative employer. Neither of those considerations are determinative and both involve questions of degree.[13]

  6. sixth, a label which the parties may have chosen to describe their relationship is not determinative of the nature of the relationship, and will rarely assist the court in characterising the relationship by reference to the contractual rights and duties of the parties.[14]

The effect of those principles is that the characterisation of a relationship as being either one of employer and employee, or one involving the engagement of an independent contractor, is ultimately an evaluative judgment that takes into account the totality of the parties’ contractual rights and obligations.[15]


Outcome


Upon scrutiny of the relevant contracts, including examination of the circumstances surrounding the making of the contracts[16] and the rights and obligations under the relevant contracts, the Court held that the relationship between JMC and Mr Harrison was one of employer and employee because he was an employee within the ordinary meaning of that term.[17]


Of particular significance in the case was the considerable degree of control JMC could exercise over Mr Harrison and his provision of the teaching services, including control in relation to how those services were to be provided[18] and when and where the services were to be provided.[19] The other terms of the contracts which suggested an employment relationship included that Mr Harrison:[20]

  • was remunerated at a fixed hourly rate;

  • was not required to provide any of his own equipment;

  • effectively ceded to JMC any intellectual property rights arising from the teaching services;

  • was required to provide certain indemnities to JMC; and

  • his engagement could be terminated on relatively short notice without cause.

The Court’s “only real pause for thought” was that Mr Harrison had a right to sub-contract to another person the provision of the teaching services, which would usually tend against a worker being an employee.[21] However, that right was subject to the written consent of a representative of JMC.[22] That was an “effective precondition” to any subcontracting, and was significant in the context of the regulatory scheme to which JMC was subject as a registered provider of tertiary education, which required JMC to ensure the person providing the teaching services had the necessary qualifications, skills, experience and capacity to meet JMC’s registration and accreditation obligations under that scheme.[23] The Court concluded as a result that Mr Harrison’s right to subcontract, “in the context of the contracts as a whole”, was limited, narrow in scope, and in reality was a:


“chimera which was unlikely to be ever exercisable or exercised.”


In those circumstances, that right to subcontract did not outweigh the other considerations which pointed towards the relationship being one of employer and employee.


Extended Meaning – s 12(3)


Despite that outcome, the Court considered it necessary and desirable to comment on whether Mr Harrison fell within s 12(3), given the possibility that a Full Court on appeal might characterise the contract or relationship as not one of employment at common law.


A person is an employee under the extended meaning in s 12(3) of the SGAA if the person works under a contract that is wholly or principally for the labour of the person. Three elements therefore need to be satisfied for a person to be an employee under that definition:[24]

  1. first, there must be a contract;

  2. second, the contract must be wholly or principally “for” the labour of the person; and

  3. third, the person must work under the contract.

Whether a contract is for the labour of the person must be approached from the perspective of the would-be employer,[25] and a contract is not wholly or principally for the labour of the would-be employee if the contract is for the provision of a result and the worker is paid for that result.[26]


It was really only the second element which was in dispute. Given the predominant purpose of the contracts, objectively apparent from their terms, was that Mr Harrison would personally provide his labour to provide the teaching services, this led to the conclusion that the contracts were principally for Mr Harrison’s labour. Mr Harrison was therefore also an employee under s 12(3) of the SGAA.


Conclusion


As JMC’s appeal turned on whether it could demonstrate Mr Harrison was not its employee, which it failed to do, it failed to discharge its burden of proving the notices of assessment were excessive or otherwise incorrect, and its appeal was dismissed.


It should be noted no appeal has been filed at the time of writing and that JMC’s time to appeal the Court’s decision expires 27 July 2022.


The full text of the decision is available on the Court’s web site here.


By Nick Dodds, Barrister


Liability limited by a scheme approved under Professional Standards Legislation

 

Endnotes:


[1] (2022) 96 ALJR 89. [2] (2022) 96 ALJR 144. [3] JMC Pty Ltd v Commissioner of Taxation [2022] FCA 750 (Reasons), [1]. [4] Reasons, [2]. [5] Reasons, [3]. [6] (1986) 160 CLR 16. [7] (2001) 207 CLR 21. [8] Reasons, [15]. [9] Reasons, [17]. [10] Reasons, [18]. [11] Reasons, [19]. [12] Reasons, [21]. [13] Reasons, [23]. [14] Reasons, [26]. [15] Reasons, [27]. [16] Reasons, [35]-[46]. [17] Reasons, [181]. [18] Reasons, [110]. [19] Reasons, [111], [182]. [20] Reasons, [182]. [21] Reasons, [118], [184]. [22] Reasons, [117]. [23] Reasons, [121]-[122], [126]. [24] Reasons, [29]. [25] Reasons, [30]. [26] Reasons, [31].




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