In recent years, there has been a steady flow of Court and Tribunal cases law dealing with whether a person is an employee or independent contractor for the purposes of the Superannuation Guarantee (Administration) Act 1992 (‘SGAA’).
The definition of employee for SGAA is wider than its ordinary meaning and includes workers contracted wholly or principally for their labour notwithstanding the fact that they are independent contractors.
This expanded definition creates uncertainty for employers as to whether superannuation obligations exist and in many of the recent cases the outcome has been that it did leaving the employer to deal with the cost and effort of rectifying the historical error.
The latest case of The Trustee For Virdis Family Trust t/a Rickard Heating Pty Ltd and Commissioner of Taxation (Taxation) [2022] AATA 3 (5 January 2022) (“Rickard”) is another example of a contractor found to be an employee under the extended definition of that term in section 12(3) of the SGAA.
In the Rickard case, the Commissioner contended that the individual engaged as a plumber was a person who worked ‘under a contract that is wholly or principally for the labour of the person’ or, alternatively, that the plumber was an employee under common law.
In reaching the decision, the Tribunal considered the test in Dental Corporation Pty Ltd v Moffett [2020] FCAFC 118 (16 July 2020) (‘Moffet’) (see October 2020 TaxEd Update article) and affirmed the Commissioner’s decision. Having determined that the plumber was an employee pursuant to the extended definition, it was unnecessary for the Tribunal to determine whether there was an employment relationship under common law.
The taxpayer, Rickard was thus found to be liable for superannuation guarantee charge for each of the quarters from 1 October 2013 to 31 March 2018.
Facts
The taxpayer, Rickard conducted a business selling and installing cooling and heating systems. The business engaged a number of employees, and from 2011 Rickard also engaged Mr. Pirie to do plumbing work as a casual subcontractor.
Under the letter of engagement, Mr. Pirie was identified as being ’employed’ under the terms and conditions as set out in the Plumbing and Fire Sprinklers Award 2010 and applicable legislation. The Tribunal noted that this statement was a little odd as awards generally only apply to employees.
The letter went on to record that Mr. Pirie’s ordinary hours of work would be 40 hours per week, at a contractor rate of $37 per hour plus any reasonable additional hours that were necessary to fulfil his duties or as otherwise required by the employer.
The letter also provided that ‘sub-contractors under the terms will look after their own superannuation…’.
In March 2017, a second letter with much the same terms provided for a rate of pay increased to $40 per hour.
The terms of engagement did not refer to anything about either Mr Pirie or Rickard letting someone else perform their part of the deal such as by assigning or delegating the work to be done under the agreement.
In practice, Mr. Pirie was told where he was required to work and he would then complete that work. Invoices were rendered by Mr. Pirie for hours worked and not for anything else. If Mr. Pirie was unable to attend work, he would notify Rickard who would arrange for a replacement. Mr. Pirie did not arrange a replacement to do his work or delegate his work to someone else. He would not be paid by Rickard if he did not work.
Materials for the contracted works were arranged by either party depending on the job, but were always paid for by Rickard.
Mr. Pirie was able to work for others while working for Rickard. However, because he was working ‘full time’ for Rickard, he did not do a great deal of work for others, and if he did this would usually be after hours or on weekends.
It was acknowledged at times Mr. Pirie was seen wearing shirts with Rickard logos.
Mr Pirie organised his own public liability insurance, although Rickard looked after his workers compensation insurance.
AAT Decision
The AAT in reaching its decision referred to the test from Moffett as to what is required to meet the expanded definition of employee under section 12(3) of the SGAA, namely that:
- there should be a contract; and
- which is wholly or principally ‘for’ the labour of a person; and
- that the person must ‘work’ under that contract.
In regard to the first element the Tribunal found that there was a contract(s) between the parties (oral and written).
The second element involves an inquiry as to the purpose of the contract from the perspective of the person obtaining the benefit of the labour. This in turn directs attention to what benefit Rickard received under the contract(s) that being:
- Mr. Pirie working, providing his labour for numbers of hours worked each week in return for an hourly rate of pay;
- Mr. Pirie having no capacity to delegate the contracted work (it is worth noting that if there was some suggestions that Mr. Pirie could delegate the work, the Tribunal rejected any such suggestions);
- Even if Mr. Pirie had provided consumables relevant to his work, the main or substantial object of the contract was to secure his labour.;
- There was no other benefit that Rickard received from the agreement.
Based on the above the conclusion drawn was that the purpose of the contract(s) from Rickard’s perspective, was ‘wholly or principally’, that is ‘mainly’ or ‘substantially’, for the provision of Mr Pirie’s labour.
The third element for consideration is that the person must, in fact, work under the contract. The Tribunal found that there was no dispute that Mr. Pirie did work under the contract(s) over the relevant period in question. If Mr. Pirie were not providing his labour, there would be no contract with him.
On that basis, the Tribunal affirmed the Commissioner’s decision that Mr. Pirie ‘works under a contract that is …principally for the labour of the person’. Mr. Pirie was an employee of Rickard under the extended definition in section 12(3) SGAA and so Rickard was liable to pay superannuation on his behalf and thus, the superannuation guarantee charge.
It is worth noting the Tribunal’s observation that ‘the superannuation guarantee scheme has no regard for private arrangements…If superannuation contributions are not made to employees as defined by the SGAA, the superannuation guarantee charge will apply regardless. The fact that Mr Pirie agreed to pay his own superannuation contributions or agreed that Rickard should not pay them is irrelevant to the liability to pay the superannuation guarantee charge’.
TaxEd’s observations and implications
The Rickard decision confirms the position in Moffett, specifically that the purpose of the contract be examined from the perspective of the person obtaining the benefit of the labour.
Where labour must be provided personally by the engaged individual with no option of delegating the contracted work to others, this is likely to trigger superannuation liability for the quasi-employer.
So, for businesses that engage sole trader contractors (e.g, not contractors that supply services through a company, trust or partnership), it may be prudent to review existing arrangements to assess whether any are principally for a person’s labour.
Where an exposure exists, in addition to the extra superannuation payable, interest and administration fees there is the possibility of Director Penalty Notices plus, and what should not be underestimated, reputational damage.
One of the usual additional penalties, the loss of a tax deduction for the extra superannuation payable won’t impact income tax exempt employers but the other exposures should be more than enough encouragement to make sure there are no hidden surprises.