Edited version of administratively binding advice

Authorisation Number: 1012583484842

Disclaimer

You cannot rely on the written binding advice in the Register of private binding rulings in your tax affairs. You can only rely on advice that we have given to you or to someone acting on your behalf.

The Register of private binding rulings is a public record of written binding advice issued by the ATO. The register is an historical record and we do not update it to reflect changes in the law or our policies.

The written binding advice in the register has been edited and may not contain all the factual details relevant to each decision. Do not use it to predict ATO policy or decisions.

Advice

Subject: Superannuation Guarantee Independent Contractor v Employee

Question 1

Are the service providers engaged by the entity considered to be employees for the purpose of Pay As you Go Withholding (PAYGW) pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Answer

No

This ruling applies for the following periods:

1 July 2013 - 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

· Service providers are required to pass an assessment test.

· There is no advertising "positions vacant" as is the case for recruiting staff.

· Service providers are required to have an Australian Business Number (ABN) and enter into an Agreement.

· The entity maintains a database.

· The client will request a service provider with the required skills at a particular time on a particular day.

· The Service provider is not obliged to accept an assignment offered.

· The Agreement provides for sub-contracting in practice. If the service provider was to have another party undertake the work, the agreement requires the other party to be accredited.

· The entity does not supervise or monitor an assignment but relies on feedback provided by the client. If the feedback is unfavourable, the entity undertakes counselling with the service provider and may offer training to overcome the issues raised by the client.

· The rates paid are in accordance with the fee schedules.

· The entity pays for a professional service rather than a product.

· The entity pays the service provider upon receipt of the completed job sheet.

· Service providers may carry on their own business but a code of ethics restricts them from soliciting services directly from the entity clients.

· Service providers are required to wear an identity card attached to a lanyard. They are not required to wear uniforms.

· Service providers are subject to the Code of Ethics.

· The entity directs the consultants in terms of scheduling of work and hours due to the necessity to meet client requirements, the consultants do not have any discretion in that regard.

· The entity does not provide stationery, phone or other items to.

· The Agreement includes an indemnity clause but does not require service providers to hold service provider policies for professional indemnity.

Relevant legislative provisions

Taxation Administration Act 1953 (TAA).

Superannuation Guarantee (Administration) Act 1992 (SGAA)

Reasons for decision

Question 1

Are the Service providers engaged by the entity considered to be employees for the purpose of Pay As you Go Withholding (PAYGW) pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Summary

Based on an assessment of the relationship between the entity and the service providers, the service provider's status is that of an independent contractor.

Detailed reasoning

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 service provider 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.

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 a service provider is an employee or an independent contractor for the purposes of the PAYG withholding provisions.

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, there is an Agreement between the entity and the service providers.

An analysis of the key indicators, as developed by the relevant case law, will be undertaken in order to ascertain the true nature of the 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 states that whether a person is an employee of another is a question of fact. The relationship 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 tests:

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.

Each of these will now be looked at and applied to your situation.

Control

As discussed at paragraph 26 of TR 2005/16, 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 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 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 service providers are not controlled by the entity whilst they are performing their work. The service providers do not wear a corporate uniform, they are required to wear an identity badge to assure the client that they are accredited with the entity and registered to carry out the work. The service providers are not monitored or supervised while carrying out the work. They have the power to decline a job request or delegate their job to another appropriately qualified person. The entity does not provide any tools of trade to the service providers.

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

The integration test is primarily concerned with establishing whether the service provider providing the service/s does so as a service provider 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 enterprises as independent contractors and whether they could be expected to generate goodwill in their own right.

In the case of Stevenson, Jordan and Harrison 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 an 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.

In the present case, the entity maintains a database utilised by its employees to identify an appropriate service provider for a requested service. The client will ask for a service provider with the required skills at a particular time on a particular day. A service provider is not obliged to accept an assignment offered. All service providers are required to have their own Australian Business Number (ABN). The service providers may carry out services for other clients however they are not permitted to solicit clients directly from the entity. The service provider would profit commercially from sound management and performance of the tasks.

The service providers are 'running their own business' and they have 'independence in the conduct of their operations'. They are engaged by the entity who exercises a level of control over them whilst they are working.

Therefore, as the service providers operate in their own business, it is an indication that they are engaged as 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 can 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 service providers are engaged to carry out work depending on the availability. The entity maintains a database utilised by its employees to identify an appropriate service provider for a requested service. The client will ask for a service provider with the required skills at a particular time on a particular day. A service provider is not obliged to accept an assignment offered. Clause 14 of the agreement permits the service providers to sub contact the assignment to another qualified service provider. Service providers are paid on completion of an assignment. The service provided is a service that produces an outcome for the client.

These facts are indicative of an independent contractor.

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 a service provider is an employee or an independent contractor. Paragraph 42 of TR 2005/16 states that if a service provider 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, the service providers have the power to decline a job request or delegate their job to another appropriately qualified person. Clause 14 of the agreement states the service provider may subcontract any assignment. Any subcontractor engaged by the service provider must be accredited or recognised by the National Accreditation Authority. Any subcontractor, or persons engaged by the service provider shall be at the service provider's expense and responsibility.

This is an indication that the workers are likely to be 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.

The service providers are responsible for incomplete or unsatisfactory works and will be offered counselling for unsatisfactory work; however the agreement does contain a termination clause.

Therefore the service provider bears the risk of the costs arising out of injury or defect when carrying out their work; it is an indication that they are independent contractors.

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 service providers have their own ABN.

Taking into consideration the circumstances of the entire employment arrangement, the service providers are considered to be independent contractors.

Ordinary meaning of employee under subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)

The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to produce the contracted result in return for an agreed payment, whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? Explains when an individual is considered to be an 'employee' under section 12 of the SGAA. The question of whether someone is an employee is one of fact, and is determined by examining the terms and circumstances of the contract, in conjunction with the key indicators expressed in common law. The totality of the relationship must be considered to determine whether, on balance, the worker is an employee.

As the facts and evidence indicate that the workers are not your employees under common law, we are required to consider the expanded definition of employee under subsection 12(3) of the SGAA.

The expanded definition of employee within section 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.

To determine whether the contract is wholly or principally for the labour of the person, we examine the terms of the contract, in light of the subsequent conduct of the parties. We consider whether:

· 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 to delegate), and

· the individual is not paid to achieve a result.

In this context, the word 'principally' assumes its commonly understood meaning, that is chiefly or mainly, and labour includes mental and artistic effort as well as physical toil. A contract may be partly for labour and partly for something else, such as the supply of goods, materials or hire of plant or machinery. Subsection 12(3) of the SGAA only applies if the contract is wholly or principally for labour.

Delegation is generally implied in a contract for services where the emphasis is on the 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 are merely self-serving statements.

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/her own means to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

The service providers are contracted to carry out work depending on the availability. They are paid on completion of an assignment and are required to submit a job sheet before payment is made.

The service providers have the power to decline a job request or delegate their job to another appropriately qualified person. The consultancy agreement states the service provider may subcontract any assignment. Any subcontractor engaged by the service provider must be accredited.

Any service provider, or persons engaged by the service provider shall be at the their expense and responsibility.

Conclusion

Upon considering all the available facts and evidence we are satisfied the workers are not your employees for the purposes of the SGAA under either the common law or the expanded definition provided under subsection 12(3) of the SGAA. Accordingly you do not have an obligation to pay superannuation contributions for the benefit of the workers under 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).