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Subject: employee v contractor

Question

Is the payee considered a contractor or an employee?

Answer

Employee

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2006

Relevant facts and circumstances

The payee was employed in 2006. He is currently still in that position.

THE payer and the payee entered into an agreement which commenced in 2006 until 2007 and then on an annual basis until further notice or unless agreed in writing.

Pertinent paragraphs contained in the agreement are as follows:

The role of the payee is to manage the activities of the payer on a day-to-day basis and act as an adviser to the Board of Directors in achieving its mission.

In providing the services, the payee will act on behalf of the Board of Directors and solely under its direct instruction. This shall include acting as Company Secretary and fulfilling all the duties associated with that role indicated below.

The payee shall make all decisions that it is empowered or required by the payer to make under this Agreement and in the execution of the duties specified therein.

The payer, through its Board of Directors, shall authorise the payee to approve expenditure of funds as required in the execution of its duties under this Agreement provided that such expenditure is within agreed budgetary limits.

The payee shall provide the payer with a detailed weekly report on its activities and expenditure each month.

Functional Duties

Manage day-to-day administrative activities of the payer and act as a contact point for members and stakeholders in the industry seeking advice and direction.

Assist the Board of Directors with planning to support improved logistic competitiveness.

Co-ordinate implementation of Board of Directors decisions.

Act as Company Secretary to the payee, in particular:

Finalising the end-of-year accounts

Ensuring appropriate audit of those accounts is conducted

Preparing the annual report

Ensuring that the Board meets and carries out all of its statutory obligations

Actively engage in problem identification and solution development on significant logistic issues and recommend to the payer where appropriate such additional projects or activities that may from time to time need to be resourced to implement the activities

Develop a detailed and comprehensive database of members and others of services to facilitate effective and efficient co-ordination of the industry's requirements with all level of involved parties and the market

Working Hours

This Agreement is based on the payee providing the services, equating to a nominated number of hours minimum for each twelve (12) month period, the performance of which is to be apportioned as evenly as possible over that period. A concentration of hours into a period of less than 12 months shall not be permitted.

Annual Leave

In the twelve (12) month period the subject of this Agreement the payee shall be entitled to a period of leave. That period shall not exceed a nominated number of days and shall be taken at a time which is mutually agreed having regard to the convenience of both parties.

Supply Necessary Equipment and Facilities

The payer shall make available to the the payee such equipment and facilities appropriate to the efficient provision of the Services.

Payee to make payment

In consideration of the undertaking by the payee to perform the Services and the payee continuing to perform the Services, the payer agrees to pay the fees and additional expenses in accordance with times and in the manner set out in the agreement.

Timing of Payment

At the end of each payment period specified in the agreement, the payee will render an invoice for the Services performed and additional expenses incurred during the period. The payer shall, subject to specific conditions, pay the full amount owing in respect of each account within a specified period.

Indemnity against Loss

The payee shall keep the Payer indemnified against any loss, damage or legal liability which may arise from the carrying out of the Services to the extent that such liability is attributable to any act or omission negligent or otherwise of the payee or the payee's employees or agents.

Insurances

The payee shall take out and keep current the following insurances:

· public risk insurance;

· workers compensation insurance;

· professional indemnity cover.

Transfer and Assignment

…… Nothing contained in this Clause shall prevent the payee from employing within the agreed fee such persons or companies as the payee may deem appropriate to assist in provision of the Services. Notwithstanding the rights of the payee, it shall not adversely affect the payer nor alter the fact that the Services are to be provided through the payee.

Payment to the Consultant

In respect of the Services, the Payee shall pay to the the payee by way of fees a nominated amount per annum to be paid monthly in arrears.

The period of time within which the Services will be undertaken shall commence on a date in 2006 until one year later in 2007 and then on an annual basis until further notice or unless otherwise agreed in writing.

Invoices shall be in a form acceptable to the payee and shall be rendered on a monthly basis for fees and expenses incurred and payment shall be in accordance with provisions of the agreement.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from a payment of salary, wages, commissioner, bonuses or allowances you pay to an individual as an employee.

A determination of whether an individual under a specific arrangement is an employee must be made by a consideration of the total factual circumstances in light of all of the indicators determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16 considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

These indicators include:

The control test: The degree of control which the payer can exercise over the payee.

The organisation or integration test: Whether the worker operates on their own account or in the business of the payer.

The results test: Whether the worker is free to employ their own means and is paid to achieve the contractually specified outcome.

The delegation test: Whether the work can be delegated or subcontracted (with or without the approval or consent of the principal).

The risk test: Whether the worker bears the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

Which party provides tools, equipment and payment of business expenses?

Control

The test for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done. The importance of control lays not so much in its actual exercise as in the right of the employer to exercise it.

A high degree of discretion or latitude in the manner in which a task is performed does not, of itself, indicate a contract for services.

Further, although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment relationship. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements any control or direction must be expressed in terms of the contract only, so that outside the contractor is free to exercise their own discretion, because they work for themselves.

In your case, right of control exists and that control is exercised by the payer. Control over the payee exists in a number of ways. He manages the day-to-day administrative activities of the payer. He acts as a contact point for members and stakeholders in the industry who seek advice and direction. He co-ordinates the implementation of the Board's decisions. The payee is to act on behalf of the Board and solely under its direct instruction. His duties have been very specifically outlined and itemised in the agreement. The payee has been authorised to approve expenditure of the payer's funds as required in the execution of his duties within budgetary constraints. He is to exercise proper skill, care and diligence in the performance of the services to a standard acceptable to the payer. He is also to liaise and consult regularly with the board to become informed of its requirements for provision of services during the term of the agreement. If he feels information, documents or other particulars are not sufficient to enable him to provide the services he is to advise the payer which shall then provide further assistance, information, or other particulars as are necessary. It appears the payee is acting as agent and spokesman for the payer and not on his own account.

Organisation or integration

In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payers business but the work is not integrated into the business rather is an accessory to it.

In your case, the payee does his work for the payer and not for his own business. At the end of each month the payee submits an invoice for the services performed and any additional expenses incurred. This amount may vary from month to month but over any 12 month period he will submit invoices for a total of an amount specified in the agreement for his services (and any expenses incurred). There would not be expected to be any generation of goodwill for the payee in his own right. It appears that the payee serves the payer in their business, and he doesn't carry on his own business. The payee does not appear to have a high degree of discretion in the duties he performs.

It would reasonably be expected that a third party which viewed the current arrangement between the payer and the payee would consider him to be an employee who works for his employer as opposed to him carrying on his own enterprises as an independent contractor

Results

Where the substance of a contract is for the production of a given result, there is a strong indication that the contract is one for services.

'The production of a given result' means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

In your case, it appears payment is made to the payee on an hourly basis despite the fact that the agreement only stipulates a total number of hours over the 12 month period he is to provide services which are to be apportioned as evenly as possible over the period.

The fact that the original agreement was in force for the period stipulated and has presumably been extended until the present day indicates that a result is not imperative as the initial agreement has merely been extended for a further number of 12 month periods providing the payer with ongoing provision of services.

Delegation

The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contractor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee.

Whereas if an individual has unfettered power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. The contractor is free to arrange for their employees to perform all or some of the work or may subcontract all or some of the work to another service provider. In these circumstances, the contractor is the party responsible for remunerating the replacement worker.

A common law employee may frequently 'delegate' tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this 'delegation' exercised by an employee is fundamentally different to the delegation exercised by a contractor outlined above. When an employee asks a colleague to take an additional shift or responsibility, the employee is not responsible for paying that replacement worker, rather the workers have merely organised a substitution or shared the work load. This is not delegation consistent with that exercised by a contractor.

The payee is not prevented in the agreement from employing, within the agreed fee, such persons or companies as he may deem appropriate or necessary to assist in the provision of services, however whoever ultimately provides the services is bound by the duties contained in the agreement.

Risk

An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies.

Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for the rectification of faulty 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 or entity 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 the employee, either to a third party or otherwise, would fall to the employer in terms of the burden of cost or time for rectification.

Nothing contained in the agreement points towards the payee bearing any risk for any services provided nor any rectification work. As a final resort the payer does have the option of terminating the agreement if any breach of the agreement occurs. The payee is however required to ensure he takes out and keeps current, public risk insurance, workers compensation insurance, and professional indemnity cover. He is also required to continue to maintain professional indemnity insurance for a period of years after the termination of the agreement.

Provision of tools and equipment and payment of business expenses

The provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

However, the provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor.

There are situations where very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work.

Further, an employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car.

As stated in the contract, the payer will provide such equipment and facilities appropriate to the efficient provisions of services including a fully maintained vehicle and mobile phone and any associated costs. The board has also authorised the payee to spend the payer's funds as required in the execution of his duties (within budgetary limits).

Conclusion

There are factors which point towards the payee being an employee and others which suggest he is an independent contractor to a minor extent. It appears to a large extent that the payee contracts to provide his labour to enable the payer to achieve its mission. The payee does not work in his own business or on his own account. The payee works in the service of the payer, in the employer's business.

After considering all the facts presented and with reference to the indicators provided in TR 2005/16, it is considered that the payee works as an employee of the payer.

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