Edited version of administratively binding advice

Authorisation Number: 1012045219207

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Advice

Subject: Superannuation Guarantee - Status of the worker

Question

Is the Worker, engaged by the Principal an employee or independent contractor for the purposes of section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

Based on the provided information the Worker is not considered to be an employee for the purposes of section 12 of the SGAA. Accordingly, the Principal does not have an obligation under the SGAA to make superannuation guarantee payments on behalf of the Worker.

This administrative binding advice applies for the following period

From 1 July 2011

The scheme commenced on

After 1 July 2011

Relevant facts

· A request for administratively binding advice (ABA) was lodged by the Accountant on behalf of the Principal in regard to its obligation to pay superannuation guarantee for the Worker.

· The following information was provided by the Principal.

· The contractor will provide such other services as are assigned to them from time to time in a conscientious and expeditious manner. The contractor will use all skill, care and diligence in performance of the services under this agreement. Where the contractor is required to provide resources, those resources will be suitable for the provision of the services and will be current and appropriate for the service provided.

· The contractor warrants that they or any of their employees and agents are competent and have the necessary skills and qualifications to provide the services.

· Either party may terminate this agreement (without prior notice) upon the happening to the other of any of the following events, namely:

o If the other party becomes insolvent or enters into a Deed of Arrangement;

o If a receiver or receiver/manager is appointed;

o If the other party is placed under official management.

· This agreement will not be assigned without the consent of the other party;

· The Principal will make payments to the contractor.

· The contractor will effect all insurance required to be maintained by law. Without limiting the generality hereof, the contractor will arrange and maintain public liability insurance, professional indemnity insurance as well as personal accident and disability insurance [or income protection insurance] and all necessary insurance in respect to its employees under the provisions of any relevant workers' compensation legislation and will, if required by the principal, produce evidence of such insurance from time to time. The Principal reserves the right to nominate the value of cover under the contractor's public liability and professional liability insurance.

· The contractor will hold and maintain all relevant licenses and any registration required by law to perform the services.

· The contractor will be responsible for and will indemnify the Principal against liability for all loss, damage or injury to person or persons or property caused by the contractor, his or her employees or agents, and all the amount of all claims, damages, costs and expenses which may be paid, suffered or incurred by the principal in respect of any loss, damage or injury will be made good at the contractor's expense and may be deducted from any moneys due or becoming due to the contractor.

· The Principal may at any time by notice in writing to the contractor require that the contractor should cease to permit a particular person or persons employed by it to be engaged in providing the services which the contractor is providing of the Principal pursuant to this agreement, and in such event the contractor will as soon as is practicable cease to provide the service of such a person or persons in or about the principal's business and will provide the services of such alternative person or persons as may be acceptable to the Principal.

· Nothing contained herein will constitute the relationship of partnership or employer and employee between the parties hereto and it is the express intention of the parties that any such relationships are denied.

· The contractor warrants that he or she is an independent contractor and will provide an ABN when invoicing the principal for payment for the services.

· The contractor agrees that all records are to remain in the principal's premises at all times due to the constraints of modern practice management software that contain all records of the business.

· The contractor agrees to keep confidential the confidential information of the principal and not to use the confidential information in any manner, which may injure or cause loss either directly or indirectly to the principal or to a related entity or which may be likely to do so.

SCHEDULE

· Provide services as reuired by the contract

· Abide by the relevant Code of Ethics and all applicable Acts;

· Maintain a professional appearance (professional/conservative dress only, eg no singlets, T-shirts, jeans etc);

· Engage in administration and reception duties if necessary

· Keep work rooms and office space in clean and orderly manner;

· The contractor's fee will be paid as follows:

· The contractor will receive 65% plus GST of all payments received for the work conducted by the contractor or her employees or agents for the Principal on and off premises.

· The contractor's fee will be paid fortnightly on receipt of invoice.

· Tools to be provided by Contractor:

· Laptop computer and necessary software (eg. Windows, Antivirus software etc.) and maintanance

· Stationary (eg. pens, writing pads, staplers etc.)

· Resource Materials.

· Tools deemed necessary for services.

· Personal amenities

· Provisions by Principal:

· Work rooms and facilities

· Specific business software and upkeep (plus initial establishment of network connection between main computer and contractor laptop)

· Internet access

· Reception and Administration Support

· Contractor business cards and letterhead

· Postage

· Photocopying

· EFTPOS facilities

· Telephone

· Electricity and Water

· Room maintenance and upkeep

· The contractor has full autonomy and responsibility regarding working hours, client contact and full decision making ability while abiding by the relevant Code of Ethics, and standard practices, policies and procedures.

· This agreement may be terminated by either party giving to the other one (1) weeks' notice in writing.

· The Tax Office requested the Principal to complete the Principal/Payer Superannuation Guarantee: Status of the worker questionnaire with any relevant documentation to support its statements.

· The completed questionnaire including other information was received by the Tax Office. The information contained within the document confirmed the following:

o The relevant period to which the ABA is applicable to is after 1 July 2011.

o The ABA request lodged on behalf of the Principal is in relation to superannuation.

· This questionnaire contained the following information:

· You contracted with the Worker to provide professional services

· You obtained the Worker's services through 'word of mouth'.

· You entered into a written agreement with the Worker.

· The Worker was able to negotiate their rate of pay as follows:

o The Worker will receive/retain 65% plus GST of all payments received from the work conducted by themselves or their employees.

· You retained the right to dismiss or terminate the services of the Worker.

· You do not employ any other workers on the same or a similar basis as the Worker.

· You also state that the Worker able to choose their own hours and days and was also able to determine their own breaks.

· The Worker was:

o Able to refuse to do a particular task or job.

o Not required to seek your permission if they wished to have a day off.

o Able to provide their services to other businesses and that they currently provides some services to others.

· The Worker worked alone and did not train, supervise or assess the work of other employees/workers of your business.

· There is no requirement for the Worker to wear or use a name badge, clothing, business cards, stationery or any other itesms promoting your business name or logo.

· The Worker does not have their own name badge, clothing, business cards, stationary or any other items promoting their business or services.

· Invoices are provided to you by the Worker for their professional services.

· You negotiated the set fees with the Worker for the work done. The Worker's payment was not dependant on the completion of the task/job and you did not perform any checks or confirm if the Worker had completed their work prior to payment.

· You also stated that you did not:

o Direct where the jobs/tasks were to be performed.

o Advertise your business on any of the assets/equipment/tools used by the Worker.

o Check to confirm that the Worker had completed their task/job before you paid them.

o Deduct any amounts from the payments made to the Worker.

o Give specific instructions (either in writing or verbally) about whether the Worker was to complete their work personally.

o Supply the Worker with any assets/equipment/tools or reimburse them for the cost of the assets/equipment/tools.

· A facsimile was received from the Pricipal's accountant. The facsimile contained the following:

o Copy of invoice from the Worker.

o Copy of letterhead containing the Principal's details.

o Copy of business card containing the Principal's business details

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 section 12

Superannuation Guarantee (Administration) Act 1992 subsection 12(3)

Reasons for decision

The SGAA states that an employer must provide the prescribed minimum level of superannuation support for its employees (unless the employees are exempt employees) or they must pay the superannuation guarantee charge (SGC).

While the term 'employee', which is defined in section 12 of the SGAA, includes common law employees, it also extends 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 that does 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 that exists between the Principal and their worker, 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 of the Principal there are a number of factors to consider. These factors are considered below.

1. Terms of engagement

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.

Some conditions of engagement are closely associated with employment and may, therefore, be persuasive indicators. For example:

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

§ provision of other benefits prescribed under an award for employees;

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

§ remuneration in the form of a salary or wage;

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

§ payer discretion (within the constraints of industrial relations laws) in respect of task allocation and termination of engagement.

However, this list is not exhaustive and it must be emphasised that there is not a standard set of conditions applicable to an employee and another (different) set applicable 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 your case

The circumstances surrounding the formation of the contract may assist in determining the true nature of the contract. However, the questionnaire responses to the question regarding the terms and circumstances of the formation of the contract along with the proposed Agreement and Schedule documents indicate that it was your intent to engage the Worker as an independent contractor.

Included in the application for ABA was a copy of the proposed Agreement between the Principal and the Worker.

This Agreement sets out the terms and conditions of the arrangement, the Principal further advises that the Worker will receive 65% plus GST of all payments received for the work conducted by them or their employees. This fee will be paid fortnightly upon receipt of a tax invoice.

The Agreement stipulates the following:

§ Nothing contained herein will constitute the relationship of partnership or employer and employee between the parties hereto and it is the express intention of the parties that any such relationships are denied.

§ The contractor warrants that he or she is an independent contractor and will provide an ABN when invoicing the principal for payment for the services.

In determining the intention of the workers, the Commissioner must decide what could reasonably be concluded from their actions. 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.

We received via facsimile a copy of an invoice from the Worker to the Principal which shows the Worker's full details including their ABN, the billing period, type of work and the 65% amount of payment to be received and a line total.

It is considered that this documentation indicates that the Worker considers themselves to be operating as an independent contractor in accordance with the Agreement. The mere fact that a worker acknowledges their status as an independent contractor cannot alter the true substance of the relationship if the underlying reality is one of employment.

Upon consideration of the facts and evidence, the Commissioner considers, on balance, the factors in the test are indicative of the engagement to be one of independent contractor.

2. Control

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 with 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.

Traditionally, a common law employee is told what work needs to be done, how it is to be done, and where it is to be done. However the mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship and a high degree of direction and control is not uncommon in contracts for services.

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. In Zuijs v.Wirth Brothers Pty Ltd (1955) 93 CLR 561 the High Court articulated the significance of control in an employment relationship in the following way:

What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters.

Additionally, Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 stated:

The question is not whether in practice the work was in fact done subject to a 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 right to control versus actual control is particularly relevant where the nature of the employment requires a considerable degree of experience, knowledge or skill. In these circumstances, it is to be expected that the employer will leave the performance of the activity up to the employee. In Hollis v. Vabu (2001) 207 CLR 21, where the decision was that bicycle couriers were considered to be employees, Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ observed that:

Vabu's whole business consisted of the delivery of documents and parcels by means of couriers. Vabu retained control of the allocation and direction of the various deliveries…Their work was allocated by Vabu's fleet controller. They were to deliver goods in the manner in which Vabu directed. In this way, Vabu's business involved the marshalling and direction of the labour of the couriers, whose efforts comprised the very essence of the public manifestation of Vabu's business.

The High Court in Zuijs v. Writh Brothers Proprietary Ltd (Zuijis) described the significance of control in the following way in the context of skilled employment where the nature of the work performed left little scope for detailed control:

What matters is the lawful authority to command as far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters.

In consideration of the type of work performed by the workers and the skills they possessed, the Commissioner believes that telling the workers what was required to be done is a basic minimum of information required for them to determine whether they could/would accept the job, and did not amount to an exercise of control over how they were to perform the work.

Due to the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it. The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over an individual in the performance of their work resided in the employer so that they were subject to your orders and directions.

A payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract. However, the mere fact that a contract may specify in detail where the contracted services are to be performed does not necessarily imply an employment relationship, and a high degree of direction and control is not uncommon in contracts for services.

While it is traditionally more indicative of an employer/employee relationship, the issue of seeking permission or providing prior notice for taking time off, is not especially conclusive in determining the true nature of the relationship. In an ongoing relationship between an independent contractor and principal, it is reasonable to conclude that a worker would need to provide adequate notice to the payer to organise a replacement if the work needed to continue.

Application of the Law to the facts provided

We consider the following information to be relevant to your working relationship with the Worker and whether you would exhibit actual control of the Worker as an employee.

You advise that the Worker would not be provided with any training as the Agreement warrants that they and any of their employees and agents are competent and have the necessary skills and qualifications to provide the services.

The Worker was not required to seek your permission or provide prior notice to you if they wished to take time off and can choose their own hours and days of work. The Schedule to the agreement states that they have full autonomy and responsibility regarding working hours, client contact and has full decision making ability regarding client service.

In the questionnaire responses you advise that you do not schedule the jobs/tasks for the Worker and that you do not direct where the jobs/tasks were to be performed. You further advise that the Worker is not supervised and has the right to refuse to do a particular job or task.

The Schedule also states that the Worker can offer comprehensive assessments, including interviewing and history taking, reviewing records etc. This indicates that the Worker is able to conduct her profession outside the provided work rooms and facilities as provided by you.

However the Agreement also stipulates that the Worker is to dress in a professional manner thereby indicating a certain level of control exercised by the Principal in relation to how the Worker was presented to the public and consequently how they represented the Principal to the public.

Based on the above factors, the Commissioner considers that the Worker held the ultimate authority to control when and where the scheduled tasks were completed.

On weighing up each of the factors in this test is has been determined that the relationship between yourself and the Worker is one of Principal and independent contractor.

3. Integration

Another significant factor in establishing the nature of a contractual relationship at common law is to determine whether the worker's services are an integral part of the employer's business (under a contract of service as an employee) or providing services as an individual carrying on his or her own business (under a contract for services as an independent contractor). This is otherwise known as the 'business' or 'integration' test.

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 Montreal v. Montreal Locomotive Works (1947) 1 DLR 161, Lord Wright said:

...it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior.

Similarly, in 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 Full Bench of the High Court in Hollis v. Vabu (2001) 207 CLR 21 endorsed the proposition stated by Windeyer J in Marshall v. Whittaker's Building Supply Co (1963) 109 CLR 210 that the distinction between an employee and independent contractor is:

…rooted fundamentally in the difference between a person who serves his employer in his, the employer's, business, and a person who carries on a trade or business of his own.

This factor was given significant prominence by the High Court as an aid to determining the common law contractual relationship between the parties to the dispute in the context of vicarious liability. In arriving at the conclusion that the bicycle courier was a common law employee of the courier company (which then became vicariously liable for the bicycle courier's negligence), Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ stated that:

Viewed as a practical matter, the bicycle couriers were not running their own business or enterprise, nor did they have independence in the conduct of their operations.

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.

This was highlighted in Hollis v Vabu at paragraph 48, where the court said in relation to bicycle couriers hired by Vabu:

The couriers were not providing skilled labour or labour which required special qualifications. A bicycle courier is unable to make an independent career as a free-lancer or to generate any 'goodwill' as a bicycle courier…

Application of the test to the facts provided

The information provided indicates that the Principal provides the work rooms and facilities, reception and administration support, in addition to telephone, professional management software and upkeep, eftpos facilities, electricity and water and maintenance and upkeep of the work rooms.

You also advise that the Worker does not have their own clothing, business cards, stationary or any other items promoting their own business or services.

In addition to this response the Principal provided a copy of a letterhead and business card as an example. These two items clearly show the relevant entity as the Principal with full address and telephone contact details. These items also included the Workers' name and position details as part of the entity. This indicates that the Worker was working for the Principal.

The Principal states that the Worker was able to provide their services to other individuals or business and that they currently provide some services to another business. The Worker does not advertise their business on any of the assets, equipment or tools used.

A review of the available facts and evidence indicates that the Worker is able to provide their services to others independently of the Principal. However whilst working for/with the Principal they do not operate on their own account as evidenced by the copies of the business card and letterhead evidence provided. Accordingly with regards to the integration test the available evidence is inconclusive as to the nature of the relationship.

4. 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 their own means (that is, 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 (World Book (Australia) Pty Ltd v. FC of T (1992) ATC 4327).

'Results' contracts describe traditional principal/independent contractor arrangements where a specific identifiable task is performed. 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 with a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in FC of T v. Barrett & Ors found that land salesmen, who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only were employees and not independent contractors. Likewise, the High Court in Hollis v. Vabu (2001) 207 CLR 21 considered that 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. Further, the Full Court of the Supreme Court of South Australia in Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

Accordingly, the 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 Law to the facts provided

The Agreement sets out that the worker will provide the services listed in the Schedule to the Agreement, for which it is agreed that they receive remuneration of 65% of the fee to the client plus GST. This amount is paid to the Worker upon receipt by the Principal of the tax invoices generated by the Worker.

Therefore it is considered that the result for which the Worker is working is the successful provision of her services to clients. This is evidenced by the invoices the worker provides to the Principal.

On balance, with respect to the results test, the available facts and evidence indicate that the relationship between the Principal and the Worker is within the ambit of a Principal and independent contractor relationship.

5. Delegation

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 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 test to the facts provided

The responses provided in the questionnaire by the Principal state that they have not given the Worker specific instructions about whether they are to complete their work personally or if they are able to delegate. However if the Worker is absent the work is not allocated to another worker whilst they are away.

The Agreement states that the Worker and or any of their employees or agents are competent and have the necessary skills and qualifications to provide the services. Therefore it is considered that the Worker has the ability to delegate their work to their own employees or agents.

In this case the information provided by the Principal both in the responses to the questionnaire and the information contained within the Agreement indicates that the relationship is one of Principal and independent contractor.

6. Risk

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees. However a principal will not be liable for negligence or injury caused by an independent contractor.

The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit), the more they are likely to be regarded as being independent. Typically, a worker who derives piece rate payments and sustains large outgoings would be so exposed. The higher the proportion of the gross income of the worker which is required to be expended in deriving that income, and the more substantial the assets which the worker brings to the tasks, the more likely that the contract is for services, or a contract with an independent contractor.

Another consideration of risk is the liability for the cost of rectifying faulty work. That is, the key underlying consideration is whether the individual is exposed to commercial risk in terms of a liability to cover the cost of rectifying defective work. This is consistent with the focus on the chance of profit and the risk of loss as a traditional indicator that a worker is an independent contractor conducting their own business.

Application of the test to the facts provided

The Principal advises that the Worker is responsible for paying their own private accident insurance, public liability insurance and professional indemnity as contained in the Agreement.

Moreover the agreement states that the Worker is responsible for and indemnifies the Principal against liability for all loss, damage or injury caused by the Worker or their employees or agents. Furthermore the Worker agreed that the Principal may deduct any expenses incurred arising from any loss, damage or injury caused by an action of the Worker and or their employees or agents from the amounts owed to the Worker by the Principal.

On the basis of the information provided, the Commissioner concludes that the Worker

bears the majority of the risk and this is therefore an indicator that the relationship between the parties is one of Principal and independent contractor.

7. Capital

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, since the worker has been integrated into the employer's business.

Independent contractors 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 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 not an employee.

Application of the test to the facts provided

The information you have provided contained in the Schedule to the Agreement indicates that the Principal undertook to provide the work rooms and facilities, management software and upkeep, internet access, reception and administration support, contractor business cards and letterhead, postage, photocopying, EFTPOS facilities, telephone, electricity and water and the upkeep and maintenance of the practice rooms.

The Worker was to provide a laptop computer and other necessary software including maintenance, stationary e.g. pens, writing pads, staplers etc, resource materials and other tools deemed necessary.

It is considered that whilst you provided the facilities where the services were to be provided the Worker was required to provide sufficient equipment and tools to satisfactorily provide the professional services. Therefore the Commissioner is satisfied that the facts and evidence suggest that the relationship between you and the Worker are indicative of Principal and independent contractor.

Conclusion - Common Law

When examining the totality of the relationship the Commissioner has considered all of the above factors individually and together. Consequently it is considered that on balance the results under section 12(1) of the SGAA are that the Worker is an independent contractor.

However it is possible that even though the Worker is not a common law employee thay may still be an employee under the extended definition of employee in subsection 12(3) of the SGAA.

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

The extended definition of employees under subsection 12(3) of the SGAA 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 requires the individual to be working wholly or principally for the labour of the person to meet the extended definition. The SGR 2005/1 provides further guidance on this issue and states at paragraph 11 that:

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 the three conditions must be met to consider a contract to be wholly or principally for the labour of the individual.

Is the Worker remunerated wholly or principally for labour?

In assessing whether a person has been remunerated wholly or principally for labour and skills the ATO view is that, in the context of subsection 12(3) of the SGAA the word 'principally' assumes its commonly understood meaning that is, chiefly or mainly.

A contract is wholly or principally for labour where the labour content exceeds 50% of the value of the contract. The payment for a result is a factor in determining whether a contract is wholly or principally for labour.

Contracts which predominantly provide for payments in respect of the supply of goods, materials, or hire of plant or machinery and any other related costs incurred by the recipient of such payments in the course of performing work under the contract are not principally for labour.

Based on the available facts and evidence, the Commissioner considers that the facts and evidence suggest that the Worker was paid primarily for their own labour and professional skills. There is no evidence that the remuneration was intended to cover any more than this as they were not required to incur any ongoing expenses in relation to where the services were provided and similarly was not required to incur any additional capital expenses.

Is the Worker required to perform the work personally?

The second requirement of subsection 12(3) of the SGAA is that it requires the labour of the individual personally. 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 the work to another person.

Paragraph 49 of SGR 2005/1 states that where a worker is engaged under contract:

If an individual power to delegate the work to others (with or without the approval or consent of the principal), there is a strong indication that the person is being engaged as an independent contractor. Under a contract for services, the emphasis is on the performance of the agreed services (achievement of the result).Unless the contract expressly requires the service provider to personally perform the contracted services, the contractor is free to arrange for his or her employees to perform all or some of the work or may subcontract all or some of the work to another service provider.

In this case the Agreement states that the Worker and or any of their employees or agents are competent and have the necessary skills and qualifications to provide the professional services. Therefore it is considered that the Worker has the ability to delegate their work to their own employees or agents.

In conclusion, the Commissioner determines that the Worker has the ability to delegate as required.

Is 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.

Therefore it is considered that the result for which the Worker is working is the successful provision of their services to clients. This is evidenced by the invoices the Worker provides to the Principal.

Conclusion

Upon review of the relationship as a whole, the Commissioner is satisfied that the Worker, is not an employee of the Principal for the purposes of the SGAA under the extended definition under subsection 12(3) of the SGAA.

Accordingly, the Principal does not have an obligation under the SGAA to provide superannuation contributions on behalf of the Worker.

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