Australia: Employees v contractors and the entitlement to superannuation payments

Last Updated: 2 August 2017
Article by Michael Bishop and Ben Drysdale

A recent case before the Federal Court of Australia, Farnan v Insurance Logic Pty Ltd & Anor [2017] FCCA 595, provided a useful restatement of the key differences between employees and independent contractors. The Court also considered whether independent contractors are entitled to superannuation payments pursuant to the broader definition of 'employee' contained in the Superannuation Guarantee (Administration) Act 1992 (SGA Act).


Proceedings were issued by a consultant, Christine Farnan, who had been engaged by two insurance brokers to provide services in respect of obtaining financial services licensing. When her engagement was terminated, Ms Farnan claimed that during the course of her consultancy, she was a common law employee of the insurance companies and was therefore owed:

  • payment in lieu of notice of termination;
  • unpaid leave entitlements; and
  • superannuation.

Contractor or employee?

The nature of any person's employment is a legal and factual question, to be examined with reference to the terminology of any relevant contract in place. Fundamentally, the question is whether a person serves an employer in the employer's business, or carries on a trade or business of their own.

In this case, the Court provided a helpful summary of the factors to be considered when determining whether a person is an employee or an independent contractor. The answers to these questions are not intended to be determinative, but instead act as more of a guide for the Courts:

  • Is there a right to the exclusive services of the person engaged?
  • Who provides the place of work and tools or equipment required?
  • Whose goodwill is created as a result of the work?
  • Does the person have the right to delegate any work?

Contractors invoicing for gross payment

One further indicative factor, of particular significance to this case, was that Ms Farnan was remunerated without any deduction having been made for income tax. The Court heard evidence that Ms Farnan had submitted her invoices for the gross amount, and that she was aware that no amounts were being deducted for tax purposes.

The Court held that Ms Farnan had so acted in order to obtain the benefits of self-employment in relation to tax, flexibility in work hours and the ability to work for other clients, whilst attempting to deny that same status in order to obtain employment benefits like annual leave and notice payment.

Unsurprisingly, Ms Farnan was not permitted to pick and choose certain aspects of her employment status in this way, as the Court held that she was not an employee of the insurance brokers at common law.

Superannuation and independent contractors

The SGA Act has the effect of expanding the meaning of the terms 'employee' and 'employer' for the purposes of superannuation only. Section 12(3) of the SGA Act provides that if a person is contracted to work under a contract that is wholly or principally for the labour of that person, the person is an employee of the other party to the contract for the purposes of superannuation.

The expanded definition of 'employee' found in the SGA Act was considered at length in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No.3) [2011] FCA 336. Justice Bromberg in this case noted that the plain wording of section 12(3) is very broad, requiring thoughtful application in certain scenarios.

One illustrative example is that of the contract between a sole practitioner solicitor and a client, which would naturally be wholly or principally for the labour of the lawyer. It is improbable that the intention of Parliament in drafting the SGA Act was that the client of a sole practitioner lawyer would provide for the retirement of that lawyer in the course of the exchange of labour for fees.

Essentially, the Courts have determined that section 12(3) of the SGA Act seeks to provide for superannuation to be paid out of the exchange of work for payment in 'employment-like' settings. The key question to ask in such situations is whether the labour component of the contract for services in question could have been provided by the recipient of the labour employing an employee instead.

The Court in Farnan v Insurance Logic held that engaging a specialist consultant for the purposes of advising in respect of financial services licensing was analogous to the example of the solicitor and client. The view of the Court was that Ms Farnan was engaged to produce a result and for that reason was not an employee entitled to payment for superannuation under the extended definition of the SGA Act.

Sham contracting arrangements and risks for employers

The Fair Work Act 2009 contains three key provisions (ss 357-359) that employers should consider when exploring independent contracting arrangements. It is an offence to represent a contract of employment as a contract for services, creating what is known as a 'sham contracting arrangement'. It is also an offence to dismiss an employee in order to re-engage them as an independent contractor to perform the same or substantially similar work under a contract for services, or to persuade an employee to perform their work as an independent contractor.

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Michael Bishop
Ben Drysdale
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