Today the Full Federal Court handed down a landmark case on the ongoing contractor vs employee debate in JMC Pty Ltd v Commissioner of Taxation  FCAFC 76. The Court’s decision was a resounding win for our client JMC, emphasising the importance of written contracts in determining employment status.
The decision reaffirms that where a relationship is comprehensively set out in a written contract which is not a sham, the determination of whether a party is an employee or an independent contractor will be based on the terms of the contract.
The decision further confirms:
- the importance of delegation and subcontracting rights and the scope of the same to the characterisation of an individual as employee or contractor – and that the right being subject to consent does not mean the right does not exist
- that not all written correspondence between parties in implementing a contract will or should constitute a “variation to the terms of the contract” – some such as the emails exchanged in this case will just constitute performance.
The taxpayer in this case, JMC, is a company that provides accredited higher education programs to students. Mr Harrison was engaged by JMC as a lecturer under a contract to deliver teaching services to students. His terms of engagement included obligations to deliver a course of lectures and mark papers – based on a fee per lecture delivered and per paper marked. Mr Harrison issued invoices for payment which included an ABN he had registered and was paid according to the terms of those invoices. He had a right to subcontract and assign the delivery of lectures and marking to others (subject to obtaining JMC’s consent) and had the ability to negotiate changes to the lecture timetable.
The ATO issued assessments of superannuation guarantee charges to JMC on the basis that Mr Harrison was an employee within the common law meaning and also the extended definition for provision of labour under sections 12(1) and 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act). At first instance Wigney J agreed.
The Full Federal Court has today overturned those decisions.
The Full Federal Court found that Mr Harrison was not an employee with the ordinary definition of that term nor was the contract “wholly or principally for the labour of the person” as required under section 12(3) of the SGA Act.
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 the teaching services. It did not matter that Mr Harrison was required to seek written consent before he was able to subcontract, nor was it relevant whether Mr Harrison had ever exercised his right to subcontract (even though he had). What was important was that Mr Harrison had the legal right to subcontract. Such a right to subcontract would only be discounted if the right was legally incapable of being exercised.
The Court further held that emails exchanged between Mr Harrison and JMC to confirm his lecturing schedule and if he intended to assign or subcontract services in advance of each semester were not contractual in nature and did not effect a variation to the terms of the contract – they just evidenced performance.
In addition, the Full Federal Court disagreed with the first instance decision about the significance of contractual terms such as:
- the obligation to use a registered business name when invoicing JMC (noting there was no evidence Mr Harrison had such a name)
- include an ABN in his invoices (which he did)
- provide invoices in the form of a tax invoice if registered for GST (Mr Harrison was not so registered)
- be responsible for workers’ compensation and income protection insurance, and indemnify JMC for any workers compensation claim.
The Full Federal Court found each of the above to be relevant and deserving of weighting for the analysis.
The Full Federal Court also held that the absence of any provisions for sick leave, holiday pay or superannuation went to the operative terms of the contract regulating the parties rights, duties and obligations and whilst not determinative of the question, must be taken into account.
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