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Authorisation Number: 1012692074050

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Ruling

Subject: Employee or Contractor

Question 1

Are the professionals, engaged through professional 'suppliers' under a 'Professionals Supply Agreement', common law employees of the company for the purposes of the income tax PAYG withholding rules and the Superannuation Guarantee (Administration) Act 1992?

Answer

No

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The company provides a professional service to clients.

The provision of these services requires the assistance of certain professionals.

For various commercial reasons in line with its business plan, the company does not wish to directly contract with professionals for their services. Instead the company seeks to rely on approved contractors able to supply appropriate professionals who are committed to the contractors and able to do tasks for the company on a task based retainer.

The 'suppliers' in the contract are not labour hire firms. It is not expected that any of the contractors will be labour hire firms.

It is expected that contractors will be controlled by professionals, groups of professionals or employers of professionals who the contractor proposes to supply to the company. It is expected that the contractor entity will be owned (through shareholdings) or controlled by directors that are registered professionals with an understanding of the requirements under the contract arrangement with the company.

There is no requirement that these professionals be employees of the contractor although there are requirements that:

a) professionals be nominated and identified under the contract; and

b) that professionals are suitably qualified and otherwise acceptable to the company;

before they are eligible to take on tasks allocated to the contractors by the company for on-allocation to a professional. Some professionals may be sub-contractors of the Suppliers.

The company will only pay the supplier and not the professionals directly. Where the contractors employ the professionals, they are responsible for withholding tax from payments to professionals, superannuation guarantee commitments and meeting other employer obligations.

The contract provides for:

a) contractors to be involved in the arrangement and allocation of tasks; and

b) for payments for tasks to be paid by the company to contractors:

which is not necessarily how a labour hire firm would make arrangements with a client. Under the arrangements in the contract it is expected that contractors will provide a higher level of administrative service to their professionals than would be expected of most commercial labour hire firms to labour they supply.  However, again, this is not a matter about which the company is concerned or involved in under the contract.

The way the process works is the company makes appointments and organises a professional. The concept is approved by its industry and government regulatory bodies. The professionals complete their tasks as per their skill and training. The company provides no procedure or instruction to the way professionals do their jobs.

Professionals will be engaged to work on a job by job basis and not on a daily/weekly/ monthly basis. Professionals typically have other jobs in their profession.

The company has traditional employees but not performing the same service as the professionals; hence, they only hire professionals through supplier firms when required.

The contract is intended as a new regime for the company. Once it is phased in all professional work provided to the company will be provided under the contract in line with the business plan of the company referred to above. It follows that the direct provision of professional services by professionals to the company, if any, will be phased out. The company does have and will continue to have employees who do work other than professional work.

The company books contractors, i.e. the suppliers, not professionals on a job by job basis. Suppliers provide the professionals to do the jobs. The company pays the Supplier by job. A job can have a time charge component charged by the Supplier.

Professional and the company standards, understood by supplied professionals, have to be met in the performance of each task to achieve the professional results expected. Professionals are thoroughly briefed as to Company standards and through a training program are trained to work without direction if they do not already have that capability. 

The restraint clause in the agreement is aimed at preventing professionals from working for nearby competitors, as certain skilled professionals may be favoured by clients and if a professional was to work in a competitor's company, a client is likely to follow. It is a competitive industry. The professionals do not exclusively work in the subject company, as stated earlier, they have other jobs.

Relevant legislative provisions

Taxation Administration Act 1953

Superannuation Guarantee (Administration) Act 1992 section 12

Reasons for decision

Summary

The professionals engaged through Suppliers for the company, are not common law employees of the company for the purposes of the income tax PAYG withholding rules and the Superannuation Guarantee (Administration) Act 1992

Detailed reasoning

In this case, professionals are engaged through a third party, the Supplier to provide specific professional duties to the company.

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.

Superannuation

The Superannuation Guarantee (Administration) Act 1992 (SGAA) states that an employer must provide the prescribed minimum level of superannuation support for their employees (unless 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 and 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 principal type of relationship and will not attract any SGC liability.

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

The task of defining the characteristics of the contract of service and 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 the employee can be a difficult task and will depend on the facts of each case.

In an ongoing relationship, it is not always clear when the precise moment the legal criteria of a contract is fulfilled, therefore it becomes necessary to determine the true nature of the whole relationship as to whether there is a common law employer/employee relationship, or whether a staff member meets the extended definition of employee under subsection 12(3) of the SGAA.

As Gray J stated in Re Porter: re Transport Workers Union of Australia:

Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

Whether a professional engaged with the company is an employee is a question of fact to be determined by examining the terms and circumstances of the engagement having regard to the key indicators expressed in the relevant case law. Defining the relationship is a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the principal and the worker must be considered. The features regarded by the courts as key indicators of whether an individual is an employee or an independent contractor at common law are discussed below:

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.

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 a Consultancy Agreement between the entity and the service providers, referred to in the Supply Agreement as Suppliers

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.

In Zujis 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 be some room for it, if only in incidental or collateral matters.

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 professionals are not controlled by the company whilst they are performing their work. The professionals perform their duties in accordance with company standard. The company provides no procedure or instruction to the way professionals do these jobs; the professionals use their own professional skills. The professionals are not monitored or supervised while carrying out the work.

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 individual providing the service/s does so as an individual carrying on a business of their own or as an integral part of another's business organisation.

Whether the worker operates on their own account or as part of a business of the payer is sometimes viewed as a consideration of whether the worker would be viewed by a third party as carrying on their 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 company requests its network of professional Suppliers to identify an appropriate professional for a requested service. The company will ask for a professional with the required skills at a particular time on a particular day. A professional is not obliged to accept an assignment offered. The Suppliers (not individual professionals) are paid by, The Company, upon receipt of a job charge or invoice, in accordance with clauses 5 and 6 of the agreement, as well as Schedule 2 of the agreement. The professionals may carry out services for other employers or medical services however, according to the restriction clause in the Professionals Supply Agreement they are not permitted to perform similar duties for competitors or similar businesses. This restriction is fair and reasonable considering it does not prevent professionals utilising their skills to make an independent career.

The professionals are employed by either the professional firms or another entity other than the company, and have 'independence in the conduct of their operations'. They are engaged by the company, who exercises a limited level of control over them whilst they are working. This is a specific control over which patients a professional assists, which rooms and at what times.

Therefore, as the service providers operate through third party professional firms, it is an indication that they are engaged through 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.

Superannuation Guarantee Ruling SGR 2005/1 provides further guidance on this issue and at paragraph 11 states:

 where the terms of the contract indicate that:

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

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

• the individual is not paid to achieve a result

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

In assessing whether a person has been remunerated wholly or principally for labour and skills, the Tax Office 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.

Generally, the value of various parts of a contract are specified, (that is, the labour and non-labour components of the contract are clearly expressed). The Tax Office view is that a contract is principally for labour if the labour content exceeds 50% of the value of the contract. Therefore, contracts which, in the main, 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. The agreements in this case indicate that payment was for labour rather than the use of tools and materials.

In the present case, the professionals are engaged to carry out work depending on their availability, the company engages the Suppliers to identify an appropriate professional for a requested service. The company will ask for a professional with the required skills at a particular time on a particular day. A professional is not obliged to accept an assignment offered. Clause 3.3 of the Supply Agreement permits the Supplier to transfer a job to another approved professional Supplier covered under the same agreement. Suppliers are paid on completion of a job (and Suppliers will then pay the professionals). The professional service produces an outcome for the client.

Above we have discussed the factors that indicate an employee/employer relationship. On the other side, the following factors are indicative of a 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 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, the 'supplier' has the power to decline a job request, transfer their job to another appropriately qualified firm. The supplier may subcontract any assignment. Any alternative professional 'supplier' engaged must be under a supply agreement with the company.

This is an indication that the workers are not likely to be employees of the company.

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.

Clause 10 of the agreement requires the 'suppliers' to maintain adequate workers compensation insurance for its professionals; and the Suppliers are required to ensure their professionals maintain appropriate qualifications and professional indemnity insurance.

Therefore the Suppliers and professionals bear the risk of the costs arising out of injury or defect when carrying out their work; it is an indication that the professionals are not employees of the company.

Further guidance on the issue of whether someone is an employee or contractor, particularly in respect of the Superannuation Guarantee Charge, is found through ATO ID 2011/87 - Superannuation Guarantee Charge: employment status of a medical practitioner operating from a medical clinic.

This ATO ID reflects on whether a medical practitioner is an employee of a medical clinic according to section 12 of the SGAA, and it was found that the medical practitioner was not an employee of the medical clinic under either the ordinary meaning of the term or any expanded meanings within section 12 of the SGAA.

The principles of ATO ID 2011/87 may be applied to the company's circumstances. The ATO ID states the following:

In the current matter, the clinic has no right of control over the manner in which the practitioner performs their services to their clients.

When considering the totality of the relationship within this case in a contractual and practical sense, it is not the view of the ATO that such a relationship is characteristic of an employer/employee relationship.

Conclusion

On balance, the working arrangement between the company and professionals engaged through professional suppliers under the Professional Supply Agreement is not considered an employer-employee relationship.

The Commissioner considers that the professionals will not be engaged as employees for the purposes of the income tax PAYG withholding rules and the SGAA under both common law and the extended definition provided under subsection 12(3) of the SGAA.

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