Edited version of administratively binding advice

Authorisation Number: 1011592369135

This edited version of your advice will be published in the public Register of private binding rulings after 28 days from the issue date of the advice. The attached Tax Office advice fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Advice

Subject: Administratively binding advice - status of worker

Question

Is the worker engaged by the principal considered to be their employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA) during the relevant period?

Advice

No, the worker is not considered to be an employee of the principal for the purposes of the SGAA. Please refer to our 'Reasons for decision' for a detailed explanation.

Relevant facts and circumstances

This advice is based on the following facts.

The principal lodged a private ruling application with the ATO in which they requested a decision on whether the worker would be considered to be their employee under the SGAA.

The application contained a copy of the Agreement which was signed by the principal and the worker in their capacity as representative of their sole trader business.

On 4 August 2010, the ATO issued 'Status of the worker' questionnaires to both parties for completion.

The ATO received a completed questionnaire from the worker, which included tax invoices and a copy of a bank statement showing two payments made by the principal.

Also the ATO received a completed questionnaire from the principal which included copies of tax invoices.

An ATO officer held a telephone conversation with a representative of the principal who clarified the following points:

The worker organised for a third party to deliver two of the training courses, for which they were paid by the principal.

The worker also organised for another third party entity to deliver another of the training courses, however he was a volunteer of the principal and was not paid for their services.

In the principal's response to question 32 of the Principal's 'Status of the worker' questionnaire regarding delegation, they had indicated that the worker could not delegate to another employee of the principal and clarified that although the worker had the option to delegate to another employee within their own business, this option was not used.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992

Subsection 12(1)

Subsection 12(3)

Reasons for decision

Employees under the SGAA

The SGAA places a requirement on all employers to provide a minimum level of superannuation support for their eligible employees by the due date or pay the superannuation guarantee charge (SGC).

While the term 'employee' which is defined in section 12 of the SGAA includes common law employees, section 12 of the SGAA also extends the definition of employee to include workers who are engaged under a contract wholly or principally for their labour. The employment relationship is often referred to as a 'contract of service'. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1 from a 'contract for service' which is typically a contractor and principal type of relationship and will not attract any SGC liability.

Therefore, it is necessary to consider not only whether there is a common law relationship of employer/employee between the parties, but also, if the common law test is not met or is inconclusive, whether the extended definition of 'employee' in subsection 12(3) of the SGAA applies.

The task of defining the characteristics of the contract of service - the employment relationship - has been the subject of much judicial consideration. As a result, some general tests have been developed by the courts to assist in the determination of the nature of the relationship. However, defining the contractual relationship between the employer and employee can be a difficult task and will depend on the facts of each case.

Accordingly it is necessary to determine the true nature of the whole relationship as to whether there is a common law employer/employee relationship, or whether the worker meets the extended definition of employee under subsection 12(3) of the SGAA.

Common law employee

The courts have developed a method for applying the ordinary, or 'common law' meaning of an 'employee'. Their approach is to look at a wide range of factors, which indicate whether a person is an employee. For example, if the employer provides the place of work, this might indicate an employment relationship, while the absence of holiday pay might suggest the opposite. The courts' decisions tend to be taken on balance, after considering the relevant factors.

The common law meaning of the term 'employee' was stated by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16. It is clear from that case that there is no single objective test which will give the answer:

it is the totality of the relationship between the parties which must be considered...the question is one of degree for which there is no exclusive measure.

While various factors have been identified by the courts as indicators of the true nature of the relationship, those features are only ever a guide to answering that question. It is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is working in the service of another (as an employee) or is working on his or her own behalf (as an independent contractor).

A clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole. That is, the parties cannot deem the relationship between themselves to be something that it is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. Subsequent conduct of the parties may demonstrate the relationship has a character contrary to the terms of the contract.

In deciding whether the worker is a common law employee, there are a number of factors to consider. Some of these factors are considered below.

Terms of engagement

The fundamental task is to determine the nature of the contract between the parties. The terms and conditions of the contract whether express or implied, in the light of the circumstances surrounding the making of the contract, whether verbal or written, will always be of considerable importance to the proper characterisation of the relationship between the parties.

Indicators which may be persuasive of an employer/employee relationship are:

· the provision of benefits such as annual, sick and long service leave;

· payer prescribed times and location for the performance of work;

· payer's discretion in respect of task allocation and termination of engagement;

· the worker uses the assets or materials provided by the payer, or is reimbursed or paid compensatory allowance for expenses incurred in the use of their own assets and materials; and

· the method of remuneration.

The list is not exhaustive and it must be emphasised that there is no standard set of conditions applicable to an employee and another to an independent contractor.

It might be argued that the parties' intention in forming a contract is not subjective, but an objective one; that is, the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Isaacs J in Curtis v. The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17:

Where parties enter into a bargain with one another whereby certain rights and obligations are created, they cannot by a mere consensual label alter the inherent character of the relations they have actually called into existence. Many cases have arisen where Courts have disregarded such labels, because in law they were wrong, and have looked beneath them to the real substance.

Therefore, simply defining someone as a contractor does not necessarily lead to the conclusion that the individual is providing services as part of an operation of their own independent business.

Application of the facts to the case

In considering the totality of the relationship in this case, we have considered all of the above factors individually and together.

In this case, the initial working relationship was established when the worker resigned from the board of the principal and was the only applicant for the contract to deliver on a contract for specific deliverables/milestones.

An Agreement was drafted between the principal and the business of the worker which the worker signed as a representative of their business rather than the contract being for their services as an individual.

The Agreement specified the terms of their engagement which included the services required, the deliverables expected at specified timeframes and the duration of the contract and that the principal could terminate the worker's services as per the Agreement, at any time and without giving any reason, by written notice.

Although the Agreement allowed for payment to be referrable to the completion of particular milestones, the assignment schedule specified that a $40 fee was payable at an hourly rate excluding GST and expenses up to $20 may be claimed without receipts. The payment was to be made within seven days of the receipt of an invoice.

In conclusion, although the worker had described their conditions as part-time in their questionnaire response, the Commissioner considers that the terms of the Agreement signed by both parties were consistent with a contractor/principal relationship.

Control test

A prominent factor in determining the nature of the relationship between parties is the degree of control which the employer has over the employee, as it goes to the root of the classical view of the master-servant relationship. The degree of control varies on the type of job, as the increasing usage of skilled labour has seen a consequential reduction in supervisory functions. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but rather whether they have the right to exercise it.

The degree of control will vary according to the type of work, but the general rule is that the greater the obligation on a person to obey the orders of another as to the manner of the performance of work, the more conclusive it will be that the worker is the employee of the principal/payer.

It is not necessary for the employer to exercise day to day control over the worker. What is important is that the employer has the legal right of control. As stated by Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389;

The question is not whether in practice the work was done subject to direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in performance of his work resided in the employer so that he was subject to the latter's orders and directions.

The classic test for determining a common law relationship is to consider if the worker is told what work needs to be done, when it is to be done, how it is to be done and where it is to be done.

Application of the facts to the case

The principal has contended in its application that they could not control the hours or specific days of the week worked by the worker, or which location the work was conducted. The principal was placed in the position of having to trust that the worker was going to deliver the services specified in the contract.

The need to engage an independent contractor was due to the fact that the principal did not have anyone who could supervise the worker. However, the worker indicated in the questionnaire response that their work was supervised in having to report to the chairman and the board.

Both parties agree that the worker was required to attend meetings with the principal to discuss their progress at monthly board meetings, therefore the Commissioner does not consider that this amounts to the supervision over their work in the context of an employer/employee relationship.

The worker's response on the questionnaire confirms that the worker was able to prioritise the work and choose their own hours and location, except when a meeting was scheduled and further agrees that they had the right to refuse work and was not required to notify the principal if they were taking time off.

The issue of control does not always rely on whether it is exercised but whether the principal had the right to exercise it.

The Commissioner concludes that the Agreement does not contain any provisions which would contradict the statements made by both parties that the principal did not have the right to control how, where and when the worker was required to work. Furthermore, the Commissioner concludes that the requirement to report on the progress of the deliverable services as specified in the contract does not of itself constitute control over what work needed to be done to complete the specified deliverables.

Therefore, the results of this case favour a contractor/principal relationship.

Integration Test

The integration test is primarily concerned with establishing whether the individual providing the service does so as an individual carrying on a business of their own or as an integral part of another's business organisation.

Whether the worker operates on their own account or as part of a business of the payer is sometimes viewed as a consideration of whether the worker would be viewed by a third party as carrying on their own enterprise as an independent contractor or operator and whether they could be expected to generate goodwill in their own right.

In the case of Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans [1952] 1 TLR 101 Denning LJ said:

...under a contract of service, a man is employed as part of the business, and his work is done as a integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

The skills involved in carrying out the work are also a useful guide in determining whether a person is carrying on their own business or not. The provision of professional skill or skilled labour may imply that the contractor is able to make an independent career by selling that skill. In the case of a contractor with an independent career, it may be implied that the contractor is able to conduct their own business using those skills.

The factors to be taken into account in deciding whether the integration test is satisfied include:

· whether the relationship between the worker and payer is an ongoing one,

· whether the worker's activities are effectively restricted to providing services to only one master, and

· whether the worker will generally profit commercially from sound management in the performance of his or her tasks (that is, whether the worker is so inextricably integrated in the business' organisation that any benefit from the worker's performance would flow to the business organisation).

Application of the facts to the case

We have identified that the worker registered their business name with the ATO and applied for an Australian business number (ABN). Typically, an individual will only register for an ABN if it is their intention to establish a business enterprise, but this of itself will not establish that this was the intention.

The fundamental distinction between a contractor and employee is whether the worker was able to profit commercially from the sound management of the employee's work. Both parties agree that the worker was able to provide services to other entities and that the worker primarily worked independently of the principal. The worker had also attempted to obtain other work through trades and expressions of interest.

However, as part of their duties specified in the assignment schedule, they were required to supervise and review the work of the principal's only employee, which is more indicative of an employer/employee relationship.

The principal contends that they only have one employee who is provided with the requisite benefits such as superannuation, holiday pay, sick leave, protective clothing and all necessary equipment. PAYG tax is also withheld from his wages. Had the worker been engaged as an employee, the principal would have provided them with the same benefits and entitlements.

There was no requirement that the worker needed to a wear uniform or any other identifying features that identified them as being an employee of the principal and they used their own stationary to invoice the principal for their services.

However, as part of the deliverables specified in the Assignment Schedule, they were required to organise six training courses and develop relationships with funding sources, training providers and appropriate industry contacts. This out of necessity would require the worker to be representing the principal rather than promoting their own business.

Furthermore, the principal's website information indicates that the worker is an Executive Officer of the principal following the resignation of the former manager, whose role the worker now occupies, and the AGM minutes is signed by them as Manager.

It can be construed from this that third party observers would be likely to consider that the worker was an integral member of the principal, rather than an independent contractor who was only engaged for a limited time to complete specified tasks.

However, it is evident that the worker's previous role as a member of the board has somewhat clouded what role they actually have within the principal's organisation.

The Commissioner therefore concludes that the outcome of the integration test is inconclusive.

Results test

Under a results based contract, payment is often made for a negotiated contract price, as opposed to an hourly rate. The meaning of the phrase 'producing a result' means the performance of a service by one party for another where the first mentioned party is free to employ his own means (i.e. third party labour, plant and equipment) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

Satisfactory completion of the specified services is the result for which the parties have bargained. That is, a payment becomes payable when, and only when, the contractual conditions have been fulfilled.

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. The production of a given result is considered to be a mark of independent contractor status.

In Worldbook (Australia) Pty Ltd v. Federal Commissioner of Taxation (1992) ATC 4327, Sheller JA said:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor…

'Results' contracts describe traditional principal/independent contract arrangements where a specific identifiable task is performed, for example the sale of encyclopaedias. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to the hours worked.

In a contract for services (whether written oral or implied), the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the result for which the parties have bargained. Conversely under a contract of service, payment is not necessarily dependant on, or referable to, the completion of the specified services.

While the notion of 'payment for result' is expected to be a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis v. Vabu (2001) 207 CLR 21 considered that the payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries.

Accordingly, the true contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties and what the worker was hired to do.

Application of the facts to the case

A contract for result is predicated on the worker achieving certain stipulated results before receiving any payment.

On the facts available the worker issued tax invoices to the principal under their business name initially for nominated services they provided, after which they eventually only invoiced for their 'Contractor hours'. The amount payable included GST.

The principal noted that the worker was engaged to meet the deliverables as per the Agreement, and that their fee was not negotiable and specified in the contract as $40/hr excluding GST.

Based on the information provided, the worker failed to meet some of the deliverables and failed to specify in their invoicing the services undertaken. This failure to enforce the terms of the contract allowed the worker to behave as an employee of the principal.

In addition, expenses were reimbursed although the Assignment Schedule specified that expenses under $20 did not require receipts and travel expenses were reimbursed at the prevailing ATO rate.

In conclusion, the contract may initially have been intended to be for a result however, payments continued to be made to the worker despite their failure to meet the terms of the contract, in order for the principal to fully expend their budgeted monies. The results of this test are therefore inconclusive.

Delegation test

The unlimited power to delegate or subcontract work is an important factor in deciding whether the worker is an employee or independent contractor. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor.

Delegation is generally implied in a contract for services where the emphasis is on result rather than the person. However, delegation clauses are considered in the context of the contract as a whole to determine if they are consistent with the apparent essence of the contract or if they are merely self-serving statements.

Delegation is not simply the delegation of task from one employee to another or the ability to swap shifts or request a fellow employee to perform some duties - it is the ability to freely subcontract or employ others to perform the work.

Application of the facts to the case

The Agreement specified that the worker was able to carry out the services required by employing other suitably qualified persons, with prior consent from the principal.

Both parties agreed in the questionnaire responses that the worker was not engaged personally for their labour as they had the right to subcontract their work. If they were not able to attend to the work required then no-one performed the work on their behalf in their absence.

Although they did not engage employees within their own business, the worker was able to organise for others to conduct the training courses they was required to deliver as part of the Assignment Schedule.

The principal advised that one of the training courses was conducted by a third party entity, who were paid for their services by the principal. However, it is noted that the Assignment Schedule specifies that the worker was required to ensure the delivery of the training and develop and nurture relationships with training providers, not required to deliver the training themself.

Therefore there was no actual delegation given to the third party entity and the subsequent payment made to them by the principal does not compromise the apparent delegation rights that existed in the worker's contract.

In conclusion, the outcome of the delegation test is indicative of a principal/contractor relationship.

Risk test

Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for rectification of fault or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor. Commonly, an independent contractor would solely bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense.

An employee on the other hand, would bear no such responsibility and the liability for any defective work of an employee, either to a third person or otherwise, would fall to the employer in terms of cost for rectification.

Application of the facts to the case

The Agreement specified that the worker was required to obtain their own insurance and indemnify the principal against actions, claims, proceedings or demands which may be brought against them arising out of their negligence or breach of a term in their contract.

Both parties agree with these statements in their questionnaire responses and that the worker was expected to correct any mistakes in their own time.

The conclusion to this test indicates that the risk the worker bore was more indicative of a principal/contractor relationship.

Capital expenses test

A worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for his work, by the employer. Furthermore, the employer is often also responsible for the business expenses incurred by the worker.

Independent contactors carrying on a business for themselves often pay and provide for their own assets, tools, equipment, maintenance costs and other expenses. As stated by McKenna J in Ready Mixed Concrete (South East) Limited v. Minister of Pensions and National Insurance [1968] 2 QB 497 at 526:

…the ownership of assets, the chance of profit and the risk of loss in the business of carriage are his and not the company's

The investment of capital, the maintenance of capital and risk of loss of capital in the event of an unsuccessful venture must be of a significant nature to deem a worker to not be an employee.

While the provision of a motor vehicle to be used as part of their work is not necessarily inconsistent with an employment relationship, the use of the vehicle must be an incidental feature of the employment to earn an income and not a fundamental reason why a person is receiving a payment.

In the case of Vabu Pty Ltd v. FC of T 96 ATC 4898 the NSW Court of Appeal held that the couriers were not employees because the drivers purchased their own vehicles and paid all the day to day operating costs of the vehicles.

Application of the facts to the case

The responses to the questionnaires were not consistent in relation to the provision of equipment to the worker's work. The principal stated that they provided the worker with the use of an office and the available office equipment as well as supplying necessary materials out of the grant funding.

However, the worker states that they were able to work from home or their office, unless a meeting was scheduled which required them to attend. The worker also stated that they provided their own car, office, computer and software program that the principal did not have.

Based on the facts of this case, it is clear that the worker was not restricted to the principal's provision of equipment to be able to complete the work required. However, whether the provision of their own equipment was fundamental to their ability to complete the work, and therefore receive payment, rather than an available option, is not manifestly evident in this case.

The results of this test are therefore inconclusive.

Conclusion - Common Law

In conclusion, the Commissioner is of the view that on balance the results under section 12(1) of the SGAA are more indicative of a principal/contractor relationship and therefore we will consider the extended definition of employee under subsection 12(3) of the SGAA.

Under subsection 12(3) of the SGAA a person who works wholly or principally for the person's labour is an employee of the other party. Subsection 12(3) of the SGAA has to be considered where there is no common law employment relationship or where there is doubt as to the common law status of an individual.

Extended definition of employee under subsections 12(3) of the SGAA

Where the common law test is not conclusive, the Commissioner must consider whether the worker meets the definition of employee under the extended definition under subsection 12(3) of the SGAA, which 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.

Subsection 12(3) of the SGAA provides that 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. Subsection 12(3) was intended to extend the scope of the SGAA beyond traditional employment relationships to take into account some independent contractors who principally provide their own labour to meet obligations under a contract.

SGR 2005/1 provides further guidance on this issue and at paragraph 11 states

where the terms of the contract indicate that:

· the individual is remunerated (either wholly or principally) for their personal labour and skills;

· the individual must perform the contractual work personally (there is no right of delegation); and

· the individual is not paid to achieve a result,

· the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

Each of these conditions must be met before subsection 12(3) of the SGAA can be satisfied.

Was the worker remunerated (either wholly or principally) for their labour?

In considering whether the worker was remunerated wholly or principally for their labour, it is necessary to examine the contractual Agreement and the invoices provided.

The Agreement made no provision for the worker to provide any materials, and if any were provided the cost would be reimbursed to them rather than incorporated into their fee of $40/hour.

This is substantiated by invoices which clearly show that the worker's remuneration was principally for their labour and any expenses claimed were reimbursed as per the Assignment Schedule in the Agreement.

It must be taken into consideration that the $40/hour fee would incorporate any expenses the worker incurred for using their home office, which were not claimed on their invoices, however the Commissioner does not consider that these would constitute the major part of the worker's contract, since the Agreement was for services to be provided rather than materials.

Therefore, the Commissioner considers that the worker was remunerated principally for their labour.

Was the worker required to perform the work personally?

The second requirement of subsection 12(3) of the SGAA is that it requires the personal labour of the contracted worker. That is the worker does not have the right to delegate or subcontract the work to another party. Even if the contractor has no intention to delegate or subcontract the work and actually performs the work personally, the contract itself is still not for the labour of the person if there is a possibility of delegating work to another person.

As established above in the discussion under the delegation test, the Commissioner concludes that there was a delegation right under the terms of the Agreement, therefore the worker was not required to perform the work personally.

Was the worker paid to achieve a result?

The third and last requirement of subsection 12(3) of the SGAA is that the payments received by the worker must not be in relation to the production of a given result, but instead should be for their labour.

Although the worker was initially engaged for payment upon results, there was an obvious change in the terms of the engagement when the worker continued to be paid despite some of the deliverables not being met, just so that the principal could pay out their budgeted monies.

As discussed above in the discussion under the results test, the Commissioner cannot make a conclusive decision that the worker was paid solely to achieve a result.

CONCLUSION

Although there are features which are inconclusive in determining the exact nature of the relationship between the worker and the principal, the Commissioner is of the view that based on the totality of the facts available; the common law indicators favour a principal/contractor relationship.

The failure to meet all three requirements under subsection 12(3) of the SGAA also indicates that the worker would not be considered an employee under the extended definition.

Therefore, upon consideration of all the available facts and evidence provided by both parties, the Commissioner considers that the worker was not an employee of the principal during the period of the Agreement, for the purposes of the SGAA.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).