Federal Commissioner of Taxation v. Barrett & Ors.

Stephen J

High Court

Judgment date: Judgment handed down 2 November 1973.

Stephen J.: This case involves a quite short point, the distinction between a servant and an independent contractor.

The incidence of pay-roll tax, under the now largely inoperative Pay-roll Tax Assessment Act 1941-1969, is made to depend upon payment by an employer of wages and part of the definition of ``wages'' is as follows -

```wages' means any wages, salary, commission, bonuses or allowances paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to any employee as such....''

The respondents, members of a large firm of South Australian land agents, contend that amounts of commission paid by them to certain land salesmen, who are engaged principally in the work of finding purchasers for land entrusted to the firm for sale, do not fall within that definition because they are not paid ``to any employee as such'' but rather to these land salesmen as independent contractors. This contention succeeded, by a majority, before a Board of Review and it is from that majority decision that this appeal is now brought by the Commissioner. The course adopted by the parties on this appeal was to tender in evidence before me the transcript of the proceedings in the hearing before the Board, no additional evidence being tendered; there was no criticism of the statement of facts contained in the Chairman's reasons, which the majority of the Board themselves adopted subject only to the addition of one further circumstance. That statement of the facts by the Chairman is both lucid and precise; it appears in the report of the reasons of the Board in 72 ATC 457 and I do not propose to survey afresh the facts of the matter generally.

Since the remuneration of salesmen is by way of commission, a form of payment specifically referred to in the definition of ``wages'', the only question is whether amounts of commission paid to salesmen are paid to persons who bear to the respondents the relationship of employees; if so those amounts will be paid to employees ``as such''.

The relevant principles of law lie in a familiar and much visited field; the principles are little in doubt although their application to particular facts may, as here, give rise to difficulty. The task, then, is to apply the principles which have been evolved in determining, over the years, whether the relationship between an employer and those engaged in working for him is that of master and servant or employer and independent contractor. The courts have, for a variety of purposes, distinguished between servants and independent contractors and it is by recourse

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to this body of law that this Court has in the past determined upon the incidence of pay-roll tax -
Queensland Stations Pty. Ltd. v. F.C. of T. (1945) 70 C.L.R. 539, per Latham C.J. at pp. 545-546, per Rich J. at pp. 548-9 and per Dixon J. at p. 552, and per Latham C.J. in
F.C. of T. v. J. Walter Thompson (Australia) Pty. Ltd. (1944) 69 C.L.R. 227.

An important factor on which the courts have fastened in differentiating between servant and independent contractor has been that of control. This distinction was first developed in determining the existence of vicarious liability to third parties for the acts of those performing work for others, the discrimen being said to be that a master was vicariously liable for the acts of his servant over whom he exercised control in the manner of performance of his work, whereas for an independent contractor, whom he might only direct as to what he should do and not how it should be done, he was not vicariously liable. In Holdsworth's History of English Law, Vol. VIII, pp. 472-479, is traced the work of Holt C.J. in the late seventeenth and early eighteenth centuries in the development of the doctrine of vicarious liability for the acts of servants while about their master's business. By the first half of the nineteenth century it was established that, generally speaking, an employer was not liable for the acts of his independent contractor, the conflicting views expressed in
Laugher v. Pointer (1826) 5 B. & C. 547, 108 E.R. 204, being resolved by Baron Parke in
Quarman v. Burnett (1840) 6 M. & W. 499, 151 E.R. 509, and by Baron Rolfe in
Reedie v. London and North Western Railway Co. (1849) 4 Ex. 244,154 E.R. 1201. Baron Bramwell subsequently delivered his celebrated aphorisms, saying, in the embezzlement case of
R. v. Walker (1858) 27 L.J.M.C. 207, at p. 208 -

``It seems to me that the difference between the relations of master and servant and of principal and agent is this: -

A principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is to be done.;''

many years later, in
Yewens v. Noakes (1880) 6 Q.B.D. 530, when interpreting a section which exempted from duties imposed upon inhabited houses those warehouses occupied only by ``a servant or other person'', his Lordship said, at p. 532 -

``A servant is a person subject to the command of his master as to the manner in which he shall do his work.''

However it is clear that the fact of control is no more than one of a number of indicia -

``a reservation of a right to direct or superintend the performance of the task cannot transform into a contract of service what in essence is an independent contract...''

per Dixon J. in the Queensland Stations case at p. 552. In that case his Honour, despite an express condition that a drover should ``obey and carry out all lawful instructions'', held him to be an independent contractor because of -

``the countervailing considerations which are found in the employment by him of servants of his own, the provision of horses, equipment, plant, rations, and a remuneration at a rate per head delivered.''

- p. 552.

Zuijs v. Wirth Brothers Pty. Ltd. (1955) 93 C.L.R. 561 further illustrates the need to consider, in each instance, all available facts in determining the nature of an employer's relationship to those who perform work for him, rather than to rely exclusively upon any one criterion, such as the reservation of the right to control.

Zuijs' case also provides Australian authority for the proposition that in the context of a modern industrial society earlier concepts of relevant control, especially in the case of those employees possessing specialised skills or talents or exercising individual judgment, require modification. In many such cases an employer cannot in fact supervise the mode of performance of work but it will be enough that the employer retains ``lawful authority to command so far as there is scope for it'', if only in ``incidental or collateral matters'' - at p. 571.

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Humberstone v. Northern Timber Mills (1949) 79 C.L.R. 389, Latham C.J. and Rich J. adhere to the test of control over the manner in which work is done, as applied by them in the Queensland Stations case, but Dixon J., while finding it adequate to dispose of the facts in Humberstone's case, said, at p. 404, that ultimately some re-statement of the classical tests in some modified form might become necessary. The English courts have of recent years gone rather further than merely to restate the classical tests. A new test has been applied which involves the question whether or not a man's work is done as an integral part of another's business or is only accessory to it; whether, to put it in slightly different terms, the person in question is performing the relevant services as a person in business on his own account; it suffices to refer to the judgment of Pennycuick V.C. in
Fall v. Hitchen [1973] 1 W.L.R. 286, in which recent authorities are reviewed and to the article in (1968) Vol. 31, Modern Law Review, p. 408. Whether or not this new test, which still involves the question of control as a factor, does more than restate the question rather than providing an answer to it may be open to doubt - Atiyah on Vicarious Liability 1967 p. 38. In
Ready Mixed Concrete (South East) Ltd. v. Minister of Pensions and National Insurance [1968] 2 Q.B. 497, MacKenna J. said of one judicial formulation of such a test that it ``raises more questions than I know how to answer'' at p. 524.

In the present case the Chairman of the Board adhered to the test of control as explained in Zuijs' case and concluded that the land salesmen were employees of the respondents. I agree with that conclusion and am of the view that on the facts no other conclusion is open regardless of whatever particular test be adopted. The other members of the Board did not confine themselves so narrowly in their approach to the matter, nor do I, with respect, discern any error in their statement of what they regard as the relevant principles of law applicable to the determination of the status of the land salesmen here in question; however there are three other respects in which I do disagree with the reasons of the majority and since it is, I think, these which have led them to a conclusion with which I cannot agree my own views can best be expressed by an examination of their conclusions.

The first of these three matters, and perhaps the most important of them, is the view taken of the judgment of Dixon J. in the Queensland Stations case. As I read the reasons of the majority of the Board, they regarded that judgment as requiring them not to apply to the construction of the Pay-roll Tax Assessment Act, at least not in any ``automatic'' manner, decisions of the Courts in quite other contexts as to whether there existed a master and servant relationship.

The Act is entitled ``An Act relating to the imposition, assessment and collection of a tax upon the payment of wages'' and central to its operation is the selection of an ``employer'' as the person liable to tax and of ``all wages paid or payable'' as the subject matter of the tax. ``Employer'' is defined in terms of he who pays wages and ``wages'' are in turn defined as various types of payments paid ``to any employee as such''. The Act thus employs the term ``employee'', unaffected by statutory definition, as the ultimate touchstone of liability of tax; it relies for its operation upon the meaning of this term of art in the law and in doing so necessarily refers to a concept which owes its origin and refinement to the common law and the meaning of which is to be found in the decisions of the Courts and cannot be divorced from them. So long as those decisions are not affected by special statutory context they will be decisive of the meaning of ``employee'' or of its more ancient but now somewhat anachronistic synonym, ``servant''.

I find nothing in the judgment of Dixon J. in the Queensland Stations case which would suggest a contrary view. His Honour's treatment of
Logan v. Gilchrist, Watt & Cunningham (1927) 33 A.L.R. 321, is not to that effect and his conclusions that the Pay-roll Tax Assessment Act did not apply depended upon his view that a master and servant relationship did not in fact exist, his Honour taking the view that in this respect Logan's case was in error, and that moreover

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the nature of the payments in question did not readily fit any of the descriptions contained in the definition of ``wages''.

The second matter calling for comment is the reference by the majority to the fact that the Pay-roll Tax Assessment Act is a taxing Act, which should not be held to be applicable in the absence of clear words imposing the tax; there then follows reference to questions of onus of proof. In my view no question here arises as to the absence of clear words imposing the tax; the wording of the Act is in this respect unambiguous and it is only in its application to particular fact situations that difficulty may arise. When the question is, as it is here, ``Are the taxpayers' payments of commission paid to any employee as such?'' there seems to me to be no room, in answering the question, for any special treatment of the matter merely because the question arises in the consideration of taxing legislation. The words of Dixon J. in the Queensland Stations case, to which the majority again refer in this connection, where he posed the question whether ``the whole transaction can fairly be brought within the tax'' - p. 554, were referable to his conclusion concerning the rather special facts of that case and appear to me to have no bearing in the present case.

The third matter concerns what was, I think, the factor regarded by the majority as decisive, namely that in this case the employers had at least equal skill and knowledge to that possessed by their land salesmen and yet voluntarily refrained from the exercise of control over those salesmen, relying instead upon the existence of mere ``self-governing'' conventions and giving the salesmen ``almost total freedom'', the most striking instance of which was their ability to take extended leave without prior permission.

It is, to my mind, of little significance that these employers, when dealing with persons working for them who are remunerated by commission, do not, in the particular circumstances of this case, impose upon those persons what the majority refer to as ``a detailed regimen''. When the work involved is that of the persuasion of buyers the manner in which it is performed must perforce vary from salesman to salesman; each employs his preferred techniques which experience has taught him and any attempted imposition of a uniform method of work might well prove very disadvantageous in the outcome. The nature of the work is precisely of that kind in which it might be expected that an employer would deal with his expert and experienced salesmen in very much the way the respondents did; I would not for that reason regard those salesmen as other than employees.

What the respondents have done, and with what appears to be marked success - it was said in evidence that their firm handles two-thirds of the sales of vacant land in Adelaide - is to give to their salesmen great scope for individual initiative because by that means they are best able to use their individual talents; yet at the same time these salesmen remain very much a part of the respondents' organisation and are subject to control in respects to which I will shortly refer and which affect the way in which they perform their work.

Each of those other circumstances present in this case and which may suggest that the salesmen are not employees are, I think, intimately associated with the fact that the salesmen are remunerated solely by a percentage of the commission earned on sales effected. Because of this the employers are not concerned with questions of hours worked, of holidays taken or, generally, of time gainfully employed. They know that they will not be the losers through idle time, at least in the sense that they are not paying for that time; they know, too, that the economic incentive afforded by payment of a share of commission should ensure a satisfactory level of sales. Of course they could, no doubt, not tolerate as part of their full-time sales staff in the metropolitan area representatives who did not supply adequate services in that area since this would adversely affect the firm's sales performance; but the regularity of hours worked or the extent of holidays taken is of no concern to them so long as an overall satisfactory rate of selling is maintained. Those salesmen engaged in selling houses, as distinct from vacant land, each have exclusive areas of Adelaide allotted to them. It is in just such a

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situation that an idle or absent salesman might prejudicially affect the firm's business since his exclusive area would then produce little business for the firm and in fact the evidence shows that this possibility is recognised by the firm; the member of the firm responsible for supervising house salesmen spoke of instances of salesmen who were not pulling their weight being replaced by more energetic salesmen. However, generally speaking, remuneration by commission only, with the financial incentive it provides, is, no doubt, enough to stimulate activity on the part of salesmen and if they are experienced and are carefully selected, as the respondents' salesmen are, there will be little call for supervision apart from ensuring that, in their dealings with the public, proper ethical standards are observed. It therefore need occasion no suprise that there is in this case little evidence of detailed supervision, its absence is not so much an indication of lack of the right to control as of an efficiently organised business in which financial incentives and good relations with responsible, carefully selected staff take the place of close supervision but without in any way affecting the subsisting relationship of employer and employee.

The fact that remuneration takes the form of commission on sales or is paid on a piece work system or in some other form not strictly related to hours worked casts little light upon the relationship between the parties -
Sadler v. Henlock (1855) 4 E. & B. 570 at p. 578 per Crompton J. cited by Lord Hanworth in
Williams v. H.V. Larsen Ltd. (1928) 21 B.W.C.C. 339 at p. 343:
Ellis v. Joseph Ellis & Co. [1905] 1 K.B. 324 at p. 330 per Cozens-Hardy L.J.:
Short v. J.& W. Henderson Ltd. (1946) S.L.T. 230 per Lord Thankerton at p. 234.

There do, however, appear to me to be a number of circumstances which point to the conclusion that these salesmen are employees. They are engaged not for a limited time or to perform one specific task but as more or less permanent representatives of the firm, thus they participate as beneficiaries, albeit in respect of small sums only, in the firm's non-contributory superannuation scheme, the relative permanency of their employment being thereby recognised; turnover of land salesmen was described as ``very, very small''. They may not, by statute, act as land salesmen for any other agents nor act in any way in connection with land dealings on their own account so long as they represent the respondents; they accurately enough describe themselves as representatives of the respondents. Their basis of remuneration, by commission, is attained only because of their proved experience and proficiency as land salesmen; until they ``become sufficiently experienced and competent to go on full commission'' they are unquestionably employees, paid by a salary plus some commission; their progression to a pure commission basis is regarded as promotion, yet they do not thereby cease to be an integral part of the firm's organisation, in fact quite the contrary; any experienced salesmen new to the firm are only permitted to become pure commission salesmen if they are of ``proven ability''. Salesmen are expected to report on their whereabouts each working day, are required to pay over to the respondents all moneys received by them from buyers and, apart from their sales activities in the field, those salesmen concerned with vacant land sales are expected to attend at the respondents' office for about one day a week in accordance with a roster, there to answer telephone enquiries and the like concerning land sales; this roster system is quite a flexible one and attendance pursuant to it advantages salesmen since enquiries relating to land sales initiated on their roster day are normally handled by them thereafter, thus providing a potential source of commission income. However their rostered attendance is also, under the respondents' system of organisation, essential to its proper functioning and by their presence and the functions they there perform they render valuable services to the respondents. Most of those salesmen concerned with vacant land sales must not only attend, on their rostered day, at the firm's head office but have other calls made on their time; for instance, when the firm is engaged in selling off a new subdivisional area these salesmen must so arrange matters between themselves as to ensure that a representative is always present at the site of the subdivision at times when enquiries from

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visiting prospective purchasers are anticipated and when sales of a particular subdivision happen to lag somewhat the salesmen will be directed to devote more attention to it. All salesmen are required to abide by the code of ethics of the Institute of which the employers are members and by the rules of the Multiple Listing Bureau and these obligations are insisted upon. For every sale effected by a salesman he is required to complete and submit a questionnaire to the respondents, the purpose of which is to provide them with a quite detailed knowledge of the circumstances of the sale which has been negotiated and of the facts leading up to its conclusion, so that they may ensure that salesmen are acting as they would wish them to; for instance, the respondents insist that salesmen should always visit the land with an intending buyer before a sale is concluded. Control of newspaper advertising and the supervision of the form of contracts which the salesmen induce buyers to execute is undertaken by the respondents.

In mentioning the foregoing matters I am not to be taken as discounting the weight of those other relevant circumstances to which the Chairman has drawn attention in the course of his decision; but it is these particular aspects, viewed in the context of the facts as a whole, which lead me to conclude that these land salesmen are employees of the respondent.

There emerges from the evidence a picture of a staff of land salesmen who enjoy a settled and permanent relationship with the respondents, although it is subject always to termination by either party, and who work exclusively for the respondents in their chosen vocation of land salesmen, receiving their commission remuneration from the respondents and conforming to the respondents' requirements concerning ethical conduct, compliance with the law and observance of approved procedures in the negotiation of sales. They are otherwise free from supervision in their primary task of effecting land sales, a task calling for highly individual qualities and a willingness to work at odd hours when the community at large is not at work. This lack of supervision is in large measure accounted for by the nature of their work and their careful selection and resultant skill and responsibility, coupled with the fact that payment by commission itself provides adequate incentive so as to safeguard the interests of the respondents. Even without reference to their rostered duties and the other tasks to which they may from time to time be directed by the respondents I would conclude from the foregoing that, whichever of the acknowledged tests of an employer-employee relationship may be applied, the conclusion must be that such a relationship does exist in the present case.

I have made little reference to the South Australian Land Agents legislation, which governs the conduct of land agents, their licensing and the registration and conduct of land salesmen; it is dealt with in some detail in the reasons of members of the Board and was sought to be relied upon by each of the parties to this appeal. However I have found its provisions to be equivocal and to cast little light upon the question here in issue.

I conclude that the remuneration by way of commission paid to land salesmen by the respondents falls within the definition of ``wages'' for the purpose of the Pay-roll Tax Assessment Act and would allow this appeal accordingly; the Commissioner's assessment of pay-roll tax is confirmed, the respondents to pay the Commissioner's costs of this appeal.

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