Taxation Ruling

IT 2576

Income tax : tax instalment deductions - arrangements involving employment (or "placement") agencies and labour hire firms

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FOI status:

May be releasedFOI number: I 1011838

PREAMBLE

The purpose of this Ruling is to provide guidelines to assist in determining whether the PAYE provisions of the income tax law apply in situations involving the use of employment (or "placement") agencies and labour hire firms.

2. It is stressed that the question of whether the PAYE provisions apply in a given case is at all times a question of fact. Each case must be examined in light of its own particular facts and the guidelines set out in this Ruling and in Taxation Ruling No IT 2129.

3. An "employment" or "placement" agency is taken to mean an individual or organisation whose business consists of maintaining registers of vacancies and/or of persons seeking employment (whether on a casual, part-time or permanent basis) and of referring prospective employees to employers. The vacancies may be for skilled, unskilled or professional positions. It is a characteristic of an agency of this type that it does not enter into arrangements to render the services of staff of a certain standard or number; rather it undertakes either merely to alert the job seeker to the fact that a particular vacancy exists or to "screen" potential employees on behalf of the employer and, having done so, remains in the picture only because it recovers a fee from either the employee, employer, or from both.

4. A "labour hire firm" is taken to mean an individual or organisation that does enter into arrangements by which it undertakes to supply the services of one or more persons possessing particular skills, at specified rates payable to the labour hire firm. Separate contractual relationships are entered into between the labour hire firm and the persons who actually perform the services that the labour hire firm has contracted to provide.

RULING

Employment Agencies

5. The fact that an individual locates employment through an employment or placement agency as described in paragraph 2 above is not considered to have any bearing on the question of whether the individual receives payments that fall within the scope of the PAYE provisions.

6. Where an individual locates employment through an employment or placement agency the tests set out in Taxation Ruling No. IT 2129 will continue to apply in determining whether that individual is an employee as such of the employer or, if not an employee as such, whether the individual is in receipt of payments under a contract wholly or principally for labour within the meaning of paragraph (a) of the definition of "salary or wages".

7. It has been suggested that in some instances; for example, in the case of casually engaged nurses where the nurse is engaged via an employment or placement agency for a short period only (e.g. for the duration of one shift), the individual cannot be said to be an employee as such. In the case of casually engaged nurses it is argued that the hospital or nursing home exercises no power of control (and therefore no master/servant relationship exists) because it is not aware of the name of the nurse until completion of the shift and, in any event, the duties carried out by the nurse are so standardised that the hospital does not give, and is not in a position to give, any directions to the nurse on the manner in which the duties are performed. This argument is not accepted. The fact that the nurse's functions become standardised and can be performed without control does not put the nurse in a position very much different from any other skilled employee. Furthermore, it is considered that the nurse would remain subject to the general control of the hospital or nursing home and that the hospital or nursing home would exercise that control if the need to do so arose.

8. It is understood to be common practice with some employment agencies that the employee's wages are paid (at the direction of the employee), by the employer direct to the agency, which then forwards a net amount on to the employee after having deducted its commission. In the cases brought to light payments are not made by the employer to the agency pursuant to any contract between the employer and agency, but rather at the written direction of the employee.

9. The fact that the wages may be paid via an "employment agency" also has no bearing on the question of whether the individual is an employee as such of the employer for the purposes of the PAYE provisions of the income tax law. So far as arrangements of this nature are concerned, it is the employer and not the employment agency, who will be liable to all of the obligations of the employer's under the PAYE provisions of the income tax law, including the obligation to make tax instalment deductions.

10. It is recognised that in many instances the agency deducts tax instalments and there is no objection to the continuation of these arrangements, provided the agency complies with all of the obligations of an employer. It must, however, be borne in mind that it is the employer and not the agency who is obliged to carry out the duties of an employer under the PAYE provisions and where an agency makes tax instalment deductions it necessarily does so under separate arrangements with the employer, not because it is under any legal obligation to do so. Accordingly, any employer who has agreed to an agency making tax instalment deductions on its behalf would need to have appropriate procedures in place to ensure that tax instalments were being deducted at the prescribed rates and that the agency was carrying out all other duties of the employer that it has agreed to undertake.

Labour Hire Arrangements

11. The question of whether payments made by a labour hire firm to the person who actually performs the service, are subject to the PAYE provisions will depend on whether the circumstances point to the conclusion that the person is an employee as such of the labour hire firm or, alternatively, whether that person is in receipt of a payment to which paragraph (a) of the definition of salary or wages applies. As mentioned in the preamble to this Ruling, these are questions of fact and each case must be examined in the light of its own facts and the guidelines set out in Taxation Ruling No. IT 2129.

COMMISSIONER OF TAXATION
8 February 1990

References

ATO references:
NO 85/7701-3

Date of effect:
Immediate

Subject References:
SALARY OR WAGES
EMPLOYMENT AGENCIES AND LABOUR HIRE FIRMS

Legislative References:
221A