Do I need to pay superannuation to contracted doctors? Clarification after the Jamsek case
Doctors and other health professionals are often engaged as contractors by medical practices. However, the process of engaging with independent contractors is far from straightforward, as it involves navigating a complex legal landscape. We are regularly asked to advise practices about their liability to pay superannuation for independent contractors and clarify the distinction between employees and contractors because of the significant consequences, including retrospective payroll tax bills, that can ensue if the issue is not handled correctly.
There is a common misconception that when a doctor (or health professional) works as a contractor, the medical practice is exempt from making superannuation contributions. Whilst this might hold true in some cases, there are certain circumstances where, although an individual may be a contractor, the entity engaging the contractor could still be obligated to make superannuation contributions. Section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act) addresses this issue. If you are not familiar with it, this section outlines an ‘extended test’ that determines the requirement for superannuation contributions. It states:
‘If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.’
In essence, if an individual works under a contract primarily aimed at providing their labour, that individual will be considered an employee of the contracting party for the purposes of superannuation under the SGA Act. This article will delve into the recent case of Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] (Jamsek), where the Full Court of the Federal Court of Australia, on remittal from the High Court of Australia, clarified the operation of this section. We outline the implications of the Jamsek decision and the potential consequences this may have for medical practices across Australia.
What were the facts of the case?
Mr Jamsek and Mr Whitby were initially employed as truck drivers by ZG Operations. However, the parties agreed to end their employment relationship and become contractors, whereby Jamsek and Whitby created partnerships with their wives and used these partnerships to purchase the trucks and carry the goods for the company. As contractors, Jamsek and Whitby paid for the truck’s upkeep, sent invoices to the company for their services, and benefitted from the tax advantages by splitting the partnership income with their wives.
What was the original decision by the High Court?
In 2022, the High Court of Australia initially held that both Jamsek and Whitby were not employees of the company and were independent contractors. Consequently, as the drivers were not considered employees, there was a question raised whether ZG Operations was required to pay superannuation to them under the ‘extended test’ in section 12(3) of the SGA Act.
The High Court of Australia did not assess whether section 12(3) of the SGA Act applied to grant superannuation rights to the drivers as deemed employees, and the case was referred back to the Full Court of the Federal Court of Australia for this determination.
We discussed the original High Court decision in more detail here.
And what did the Full Court decide?
The Full Court of the Federal Court of Australia held, on the remitted appeal, that the primary judge correctly found the drivers had not proved to the requisite standard that they were employees within the extended test in section 12(3) of the SGA Act. More specifically, the Full Court applied the same three-part test used in the decision Dental Corporation Pty Ltd v Moffett [2020] FCAFC 118, which requires the following test to be satisfied in order for a worker to be considered an employee;
There should be a contract;
Which is wholly or principally for the labour of a person; and
That the person must work under that contract.
Therefore, as there was not a ‘contract’ with an individual, nor was the contract ‘wholly or principally for the labour of the person’, as required by the extended test, Jamsek and Whitby were not entitled to superannuation from ZG Operations Pty Ltd.
Nonetheless, the Court accepted the Commissioner of Taxation’s submissions, in particular, that section 12(3) of the SGA Act:
This will only apply when the “employee” is an identified natural person and party to the contract. In the Jamsek case, the drivers were engaged with ZG as a partnership and not in their personal capacity. Therefore, in order to satisfy this element, only a natural person can work under a contract.
Will not be satisfied ‘where a contract is properly characterised as being for the provision of a result and not for labour.’ While Jamsek and Whitby used the trucks supplied by ZG to deliver goods and were paid at an hourly rate, suggesting their contract was for labour. This is because rather than being results-based, the Full Court of Australia held the contract was not wholly or principally for labour as the partnership could pass delivery tasks to substitute drivers with ZG’s approval, and the service contract demanded the partnership provide their own trucks. The latter importantly added a substantial non-labour aspect to the contract, which supported the view that labour was not the primary benefit.
What does this all mean for me? Do I need to pay superannuation to medical doctors who are providing services to my practice?
While this case does not specifically involve doctors, this case serves as an important reminder to consider whether your medical practice is potentially liable for superannuation contributions to independent contractors, be they medical practitioners or health professionals.
Medical practices, among other businesses, must be vigilant in assessing and understanding their relationships with those who provide services within their practice. To achieve this, your contracts should be well-drafted and kept current. By ensuring compliance, practices can safeguard themselves from potential legal complications.
It is important to remember that the interpretation of your situation falls on the wording of section 12(3) of the SGA Act and the specific details of your written agreement. If the doctor or health practitioner is indeed a ‘person’ operating under a contract that is ‘wholly or principally for the(ir) labour’, then the practice will be at risk of liability for their superannuation contributions.
However, as this case demonstrates, it can be difficult to determine who is an employee at common law or for superannuation purposes under section 12(3) of the SGA Act. We can assist you in making this determination regarding your medical doctors and health professionals, as well as creating Agreements that take this into account. Feel free to reach out to us if you have any questions here.