Edited version of your private ruling

Authorisation Number: 1012477624305

Ruling

Subject: Employee vs. independent contractor

Question 1

Does the arrangement between X Pty Ltd (the "Company") and their sales representatives constitute an employee arrangement for the purposes of Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) and section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

10 April 2013.

Relevant facts and circumstances

1. X Pty Ltd (the "Company") is a X manufacturer;

2. The Company regularly attends X and marketing shows, to market and sell products;

3. The Company engages sales representatives to attend the shows to help sell their products;

4. The sales representatives have an Australian Business Number ("ABN") and invoice the Company once they have completed their work;

5. The sales representatives are paid a daily rate of X, including a commission of X to X per product sold;

6. The Company reimburses the cost of any travel that the sales representatives incur in attending the shows, including additional expenses such as meal allowances;

7. The sales representatives are contracted when required, ranging from once a year, up to 12 times a year (depending on how many caravan shows are held);

8. The Company telephones the sales representatives that they want to use at the caravan shows, and they have the discretion to say whether they are available to work or not;

9. Clause 3 of the Contract for Services states:

10. The Company has worker agreements in place, which prevent the sales representatives from paying another person to do the work for them;

11. Clause 1.1 of the contract states that: "Services means the services to be performed by the Contractor in accordance with this Contract, as specified in Item 5 of the Schedule". However, the representative of the Company has stated that, in practice, the Services are not listed in the Schedule, and the Contractor is engaged to perform a sales role under the direction and control of the Company.

12. The sales representatives are required to wear the Company's corporate uniform;

13. Clause 14 of the Contract for Services states X.

14. Whilst working at the Company's site, the sales representatives are liable for losses arising from breach of contract. ,However, the Company has advised that if someone is hurt on the Company's site, the Company is liable;

15. The sales representatives are not hired through a labour hire firm, and they are not apprentices;

16. The sales representatives do not need to provide their own tools or trade equipment to perform their work;

17. The Company has control over the sales representatives whilst they are working for them at the product shows, and can instruct them accordingly; and

18. The sales representatives are reimbursed for any travel expenses that they incur in attending the shows, and are provided with meals during the shows.

Relevant legislative provisions

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953

Section 12 of the Superannuation Guarantee (Administration) Act 1992

Reasons for decision

In accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA), an entity is required to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that entity or another entity). The terms 'employee' 'salary' and 'wages' are not defined in the in the TAA, and as such, they are given their ordinary meaning.

In accordance with paragraph 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) an 'employee' for superannuation guarantee purposes includes anyone who is an employee at common law.

Employee at common law

Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them, and by taking into account the key indicators expressed in the relevant case law.

Taxation Ruling TR 2005/16 income tax: Pay as You Go- Withholding from payments to employees (TR 2005/16) provides guidance as to whether an individual is an employee or an independent contractor for the purposes of the PAYG withholding provisions. The ruling mirrors Superannuation Guarantee Ruling SGR 2005/1 Superannuation Guarantee: who is an employee? (SGR 2005/1)).

Contract

As explained at paragraph 21 of TR 2005/16, contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor, and not employer and employee. 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 is not.

Further, the parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of the relationship is one of employment, the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker's status is that of an independent contractor.

In Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd [2004] SASC 288; 2004 ATC 4933; (2004) 57 ATR 147 (Roy Morgan) the Full Court of the Supreme Court of South Australia considered whether interviewers engaged by Roy Morgan were employees or independent contractors in the context of pay-roll tax. A clause in the contract between the parties stipulated that the interviewers were independent contractors. However, in arriving at the decision that the interviewers were employees, the Court held that such a clause should not be regarded as confirmation of the status of the interviewers as independent contractors.

As expressed at paragraph 16 of TR 2005/16, it can be difficult to discern the true character of an employment relationship from the facts of the case, as the intentions of the parties may be unclear or ambiguous, for instance, where the terms of the contract are disputed by the parties, or are otherwise in apparent conflict.

In the present case, although the contract between the Company and the sales representatives refers to it as being a 'contract for services' and that the workers are employed as 'contractors', it does not reflect the true nature of the relationship.

In addition, the intentions of the parties to the contract are unclear. Although it refers to the relationship being between an employer/independent contractor, the facts provided by the Company do not necessarily indicate that the sales representatives are independent contractors.

Therefore, with due consideration of the above, a careful analysis of the key indicators, as developed by the relevant case law, will need to be undertaken in order to ascertain the true nature of the employment relationship.

Key indicators

The common law meaning of the term 'employee' was discussed by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16 (Stevens v. Brodribb):

…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.

It is clear from the above case that there is no single test for determining the distinction between an employee and an independent contractor.

Paragraph 7 of TR 2005/16 (paragraph 32 of SGR 2005/1) states that whether a person is an employee of another is a question of fact. It is determined by examining the terms and circumstances of the contract between them, and having regard to the key indicators expressed in the relevant case law, which include the following:

1) Control;

2) Does the worker operate on their own account, or in the business of the payer?;

3) 'Results' contracts;

4) Whether the work can be delegated or subcontracted;

5) Risk; and

6) Provision of tools and equipment and payment of business expenses.

Control

As discussed at paragraph 26 of TR 2005/16 (paragraph 33 of SGR 2005/1), the classic '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.

In an employer/employee relationship, a common law employee is told not only what work is to be done, but how and where it is to be done. Paragraph 26 of TR 2005/16 elaborates by stating that 'the importance of control lies not so much in its actual exercise, although it is clearly relevant, as in the right of the employer to exercise it'.

Paragraph 31 of TR 2005/16 (paragraph 38 of SGR 2005/1) discusses the case of Hollis v Vabu Pty Ltd (2001) 47 ATR 559 (Hollis v. Vabu). In that case, the fact that the couriers engaged by Vabu had little control over the manner of performing their work was an important factor leading to the conclusion that the bicycle courier in question was a common law employee of Vabu. 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

In addition to the above, as stated by Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 at 404:

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 the performance of his work resided in the employer so that he was subject to the latter's orders and directions.

As stated by Mason J in Stevens v Brodribb Mason at 9:

A prominent factor in 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. It has been held, however, that the importance of control lies not so much in its actual exercise, although it is clearly relevant, as in the right of the employer to exercise it.

Paragraph 29 of TR 2005/16 explains that while control is important, it is not the sole indicator of whether or not a relationship is one of employment. Nevertheless, as explained at paragraph 30 of TR 2005/16, control is still the number one indicia to be considered when determining the nature of an employment relationship. For example, it was recognised by Wilson and Dawson JJ in Stevens v. Brodribb (1986) 160 CLR 16 at 36 that:

In many, if not most cases, it is still appropriate to apply the control test in the first instance because it remains the surest guide to whether a person is contracting independently or serving as an employee.

In the present circumstances, the sales representatives are controlled by the Company whilst they are performing their work at the X shows. They wear the corporate uniform, and act in accordance with the Company's directions. There is little scope for the sales representatives to act outside the control of the Company.

Although the contract does not specifically refer to the level of control that the Company can exercise over the sales representatives, based on the facts provided, the ultimate authority over the workers, in the performance of their duties, resides with the Company.

Does the worker operate on their own account or in the business of the payer?

In the leading High Court case, Hollis v Vabu, the majority of the Court quoted the following statement made by Windeyer J in Marshall v. Whittaker's Building Supply Co (1963) 109 CLR 210:

… 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.

In Hollis v. Vabu, the High Court considered the distinction between an employee and an independent contractor when determining whether a bicycle courier was a common law employee of Vabu. The majority found that the bicycle courier was a common law employee of Vabu, and stated:

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.

While the majority did, in reaching its decision, consider lawful authority to command (that is control) and other relevant aspects of the relationship between the parties, it was also concerned with the fundamental question of whether the worker was operating their own business, or was operating within Vabu's business.

Therefore, in accordance with the above, when applying the indicators of employment, as discussed in Hollis v Vabu, and listed in TR 2005/16, it is also necessary to keep in mind the distinction between a worker operating on his or her own account, and a worker operating in the business of the payer.

In the present case, once the sales representatives have completed the work required of them, they invoice the Company. However, this, of itself, does not indicate that they are operating on their 'own account'.

The sales representatives are not 'running their own business' and they do not have 'independence in the conduct of their operations'. They are contracted by the Company, who exercises a level of control over them whilst they are working at the X shows.

Therefore, as the sales representatives operate in the business of the Company, it is an indication that they are engaged as employees, rather than independent contractors.

'Results' contracts

If the substance of a contract is to 'produce a given result', it is a strong indication of not being an employee/employer relationship. As stated at paragraph 36 of TR 2005/16:

The phrase '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 outcomes. Satisfactory completion of the specified services is the result for which 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".

However, as elaborated at paragraph 39 of TR 2005/16, even where there is 'payment for a result' an employee/employer relationship has still be found, as detailed below:

· The High Court in FC of T v. Barrett & Ors 73 ATC 4147 at 4153 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;

· The High Court in Hollis v. Vabu 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; and

· The Full Court of the Supreme Court of South Australia in Roy Morgan [2004] SASC 288 found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

Paragraph 40 of TR 2005/16 states that the contractual relationship as a whole must still be considered in order to determine the true character of the relationship between the parties.

In the present case, the contract does not indicate whether there is a specific result required of the sales representatives. However, based on the facts, the sales representatives are contracted to sell products, as opposed to achieving a 'specific result'. They are required to work with the Company, to sell their products. The Company pays the sales representatives a daily rate of X, and commission of X to X per caravan sold.

These facts are indicative of an employee/employer relationship.

Whether the work can be delegated or subcontracted

In accordance with paragraph 41 of TR 2005/16, the capacity to subcontract work is an important factor when determining whether an individual is an employee or an independent contractor. Paragraph 42 of TR 2005/16 states that if an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), it is a strong indication that the person is engaged as an independent contractor.

In the present case, under clause 3.2 of the Contract the sales representatives have the power to delegate their job to another appropriately qualified person with prior consent of the Company. The Contract by itself does not give the sales representatives the power to delegate or sub-contract; only on agreement with the Company can this power be exercised.

However, the facts provided by the Company state that there are 'worker agreements in place', which prevent the sales representatives from paying another individual to perform the work on their behalf

This is an indication that the workers are likely to be employees of the Company, as opposed to independent contractors.

Risk

As discussed at paragraph 44 of TR 2005/16, in the case of Hollis v Vabu, where a worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, he or she is more likely to be an employee.

Conversely, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of their work, and often carries their own insurance and indemnity policies.

In the present case, the sales representatives are liable for losses arising from breach of contract and the Company is liable for any injury occurring at the Company's site. Furthermore, there is no evidence to suggest that the sales representatives have their own insurance and indemnity policies.

Therefore, as the sales representative bears little risk of the costs arising out of injury or defect when carrying out their work at the caravan shows, it is an indication that they are employees of the Company.

Other indicators

In addition to the above indicia, paragraph 52 of TR 2005/16 states that the requirement for a worker to wear a company uniform is an indicator of an employment relationship existing between the contracting parties.

In Hollis v. Vabu, the fact that the couriers were presented to the public, and to those using the courier service, as emanations of Vabu (the couriers were wearing uniforms bearing Vabu's logo) was an important factor supporting the majority's decision that the bicycle couriers were employees.

Paragraph 50 of TR 2005/16 explains that 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.

However, despite the above, paragraph 49 of TR 2005/16 notes that a particular fact by itself will not lead to the conclusion that an individual is engaged as an employee. The weight or emphasis given to each indicator depends on the particular circumstances, and the context and nature of the contractual work. All the other facts must be considered to determine the nature of the contractual relationship.

The sales representatives are required to wear the Company's corporate uniform whilst undertaking their work. This is indicative of the fact that they are presented to the public, and those attending the X shows, as employees of the Company.

The sales representatives are reimbursed for any travel expenses that they incur in attending the shows, and are provided with meals during the day.

The above indicators, although not decisive, lend weight to the argument that the sale representatives are employees of the company.

Australian Business Number

As discussed at paragraph 9 of TR 2005/16, a person who holds an Australian Business Number (ABN) may, depending on the circumstances, still be an employee.

The sales representatives have and ABN and invoice the Company. However, taking into consideration the circumstances of the entire employment arrangement, the sales representatives may nonetheless be considered employees of the Company.

Conclusion

On balance, the working arrangement between the Company and the sales representatives is considered to be an employer/employee relationship.

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).