Employee vs Contractor – A super win for the employer (for now!)

ATO/General, Commercial, Public
Author: Cynthia Voon
3 Jul 2023

On 23 May 2023 the Full Federal Court handed down a decision in relation to an appeal another superannuation and contractor vs employee case; JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76.

The taxpayer was successful (for now). We covered the original decision and relevant facts in our August 2022 article – click here to have a read.

On appeal the Court held the lecturer, Mr. Harrison (engaged by JMC to provide lecturing services in higher education courses) was an independent contractor and not an employee for superannuation purposes under both the ordinary and extended meaning of that term in s.12(3) Superannuation Guarantee (Administration) Act 1992 (SGAA).

S.12(3) SGAA broadens the scope of employment relationship (requiring superannuation contributions to be made) to include situations where a worker perform works under a contract that is wholly or principally for labour.

The appeal decision reaffirms the High Court judgements in Personnel Contracting and Jamsek  which give primacy to the contract in determining the status of a worker.

The decision adds to a growing body of precedent supporting that, where the legal rights and obligations of parties are comprehensively set out in a written contract (and the validity of which is not challenged as a sham or otherwise ineffective), the nature of the work relationship is to be determined based solely on the contractual terms and not the parties subsequent conduct.

The ‘multifactorial test’ to analyse the parties working relationship remains relevant but is considered only in respect of the contractual rights, duties and obligations as set out in a valid written contract.

Some key takeaways

In terms of the indicia of employment the Court made the following observations:

  • where a worker’s contractual right to delegate or subcontract is subject to consent from the principal, such a right does not cease to exist because consent is required. It is the existence of the right to delegate or subcontract which is important rather than whether the right is likely to be or have in fact been exercised;
  • where the right to delegate is limited in scope for example relating only to discrete tasks as opposed to the whole, or the clause is a sham, then the right to delegate may not carry much weight against contrary and more compelling indicia of employment;
  • the right to control the work of the person engaged is about the contractual authority of each party to exercise control over what, how, where and when the work is performed, having regard to the commercial and practical context in which the contract was made; rather than how control is actually exercised;
  • the mode and manner of how the worker is remunerated including the principal’s contractual right to deduct costs of engaging a replacement from payments to the person engaged is indicative of a independent contractor relationship;
  • in the context of s.12(3) the right to subcontract indicates that the contract was not “wholly or principally for the labour of the person”.

Whilst the appeal is a win for the taxpayer, TaxEd understands that the Commissioner is considering seeking special leave to appeal to the High Court.

How can businesses prepare?

TaxEd expects more developments in this area.

In the meantime businesses that engage contractors should ensure contractual terms accurately reflect the service provision arrangement with the duties and obligations under the contract are clearly stated.

As part of good governance businesses should also acquaint themselves with the ATO’s proposed risk assessment framework for worker classification in PCG 2022/D5. We discussed PCG 2022/D5 in our January 2023 article – click here to have a read. PCG 2022/D5 is a welcome  attempt by the ATO to create a risk framework that may help to reduce disputes and litigation that are common in relation to the classification of a worker.

The proposed ATO risk framework includes 4 risk zones and different criteria are set out for each risk zone. For the Very Low, Low and Medium risk zones it is necessary for businesses that intend to rely on the Guideline to seek professional advice from a qualified third party (e.g., a solicitor or tax professional) confirming that the worker classification adopted is correct under both the common law definition of employee and the extended definition. An assessment from a professional practitioner of the correct worker classification will also mitigate any risks of businesses not meeting their tax and superannuation obligations.

Of particular significance is the proposed ATO position that where an employer has implemented the processes outlined in the very low risk category it will not apply resources in relation to the arrangements involved. In other words the ATO will accept the worker classification applied by the parties.


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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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