Edited version of your written advice

Authorisation Number: 1012931193610

Date of advice: 6 January 2016

Advice

Subject: Status of Worker

Question

Will workers paid by your organisation be employees in accordance with section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

Yes. Refer to 'Why we have made this decision'.

This advice applies for the following period

1 July 2015 - 30 June 2016

This scheme commenced on

1 July 2015

Relevant facts and circumstances

1. You are a small association.

2. You provide professional advice and resources for a Project. The agreement the workers work under states they will perform the Project as an independent contractor in accordance with the Terms of Reference attachment.

3. The agreement contains clauses that:

• assign all intellectual property rights to the association;

• indemnify the association for any losses, costs and expenses arising in the course of the worker providing their services;

• prevent the delegation of duties assigned to the worker;

• provide for termination of the agreement at any time by written notice; and

• state an amount of payment to be made for a maximum number of hours to be worked per month.

4. The Terms of Reference (TOR) attached to the agreement is to describe the skill sets required and the operating framework for the workers. The TOR provides the following relevant terms:

• A worker will be paid a monthly stipend for their services and an allowance for costs.

• A worker will require an ABN.

• Workers will:

a. participate in a 1-2 hour training program at the commencement of their appointment

b. commit to working a certain number of hours per month;

c. work collaboratively with your employees;

d. respond to queries as they arise;

e. communicate with clients via online, email or phone;

f. be in regular communication with the employees for feedback and reporting purposes;

g. participate in teleconference/webinar with the entire workers group each quarter and consult with other workers as necessary.

• Clients will submit queries online or via email that will be answered by an employee or directed to a worker to complete.

• The support officer or teacher will compile a written response to the query.

• The support officer will post the response in the public forum as well as sending the response directly to the client via email.

• Workers will communicate to a support officer if they are unable to keep to the timeframes or are unable to provide a suitable answer to the query, so that query can be passed on to another member if necessary.

• Workers will be encouraged to work as a team and be supported where appropriate by the support officer.

• A worker will be required to submit a form for work done and time spent.

Reasons for decision

Summary

5. Work performed in accordance with the terms of the agreement will result in a worker being an employee under both the common law definition and the expanded definition as set out in subsection 12(3) of the SGAA. You therefore will have an obligation to pay superannuation contributions on behalf of the workers.

Detailed reasoning

6. The SGAA states that an employer must provide the required minimum level of superannuation support for its employees or pay the Superannuation Guarantee Charge (SGC).

7. The definition of employee under section 12 of the SGAA includes a common law employee and extends to include workers who are engaged under a contract wholly or principally for their labour. This employment relationship is often referred to as a 'contract of service'. Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? distinguishes this relationship from a 'contract for service' which is typically a contractor and principal type of relationship which does not attract an SGC liability.

8. 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 difficult and will depend on the facts of each case.

9. Accordingly it is necessary to determine the true nature of the whole relationship between the principal and the workers, as to whether there was a common law employer and employee relationship, or whether the workers meet the expanded definition of employee under subsection 12(3) of the SGAA.

10. The fundamental task is to determine the nature of the contract between the parties. The terms and conditions of the contract, whether express or implied, in light of the circumstances surrounding the making of the contract, will always be of considerable importance to the proper characterisation of the relationship between the parties.

11. Contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of 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. 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 a 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.

Common law employee

12. In deciding whether an individual is a common law employee, there are a number of common law factors to consider. The common law factors we have considered are discussed below.

Control

13. The extent to which the employer has the right to control the manner in which the work is performed is the classic test for determining the nature of a working relationship. 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.

14. 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. A high degree of direction and control is common in contracts for services because the payer has the right to specify in the contract how the services are to be performed. However, it needs to be remembered that an independent contractor is a person who is doing an independent trade, business, or profession in which they offer their services to the public. The person who contracts or hires them for their services must only have the right to control or direct the result of the work, not the ways and methods of getting the result.

15. Paragraphs 36 and 37 of SGR 2005/1 provide that while control is important, it is not the sole indicator of whether or not a relationship is one of employment. The approach of the Courts has been to regard it as one of a number of indicia which must be considered in determination of that question.

16. Under the terms of your agreement a worker must work within the operating framework of the attached Terms of Reference. This includes participating in a training program, working collaboratively with your employees, providing feedback and reports to the employees and the requirement to participate in teleconference/webinars and consult with other workers as necessary.

17. The TOR also appears to indicate that work queries are directed from an employee to a worker. A worker is to report to the employee if they cannot complete a job within the specified time period so that the job may be transferred to another worker if necessary.

18. The above factors would indicate that a worker under this arrangement does not have the level of control of an independent contractor as your business is directing the ways and methods of getting the end result. Jobs are essentially being provided to workers according to their area of expertise and availability and they are required to work collaboratively with the employee who directs workflow, monitors timeframes, collects reports and overseas the provision of the end product. The role of employee can be likened to a supervisory role of an employer.

19. The fact that a worker may have some discretion on the amount of hours they work per month will not alter the control test.

Integration

20. 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 known as the 'integration' test.

21. If the worker's services are an integral and essential part of the employer's business that engages them, they are considered by the courts to be a common law employee. If the worker is providing services as an individual carrying on their own business, they are an independent contractor.

22. It is necessary to keep in mind the distinction between a worker operating their own business and a worker operating in the business of the payer. The worker needs to be running their own business or enterprise and have independence in the conduct of their operations.

23. There are both arguments for and against the integration test being met.

24. Under the agreement a worker is only required to work a maximum of 10 hours per month and has the right to work for other employers. However, your association primarily provides a service to clients and the workers are the means of how this service is provided. Therefore the service provided by the workers is an essential part of this business. Workers are also encouraged by you to work as a team.

25. It is also noted that the benefits arising from the work flow to your business rather than the worker as evidenced by you acquiring the intellectual property rights resulting from the Project.

Results test

26. 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.

27. '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.

28. 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.

29. It is clear in this case that workers are paid a set amount of $X for a maximum of ten hours worked per month. There are not set a number of queries or other tasks to be completed. A worker is merely paid for the time spent providing their service to the association. The provision of timesheets and forms is for your statistical purposes, however, this can also be an indication that work provided is for a contract of labour.

30. The conditions outlined above are not consistent with a result based contract.

Delegation

31. 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.

32. 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.

33. 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.

34. The terms of the agreement state that a worker must not engage any other individual or entity to perform the Project on their behalf, subsequently, a worker does not have the right of delegation.

Risk

35. 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.

36. 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.

37. 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.

38. 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.

39. In accordance with the agreement a worker will indemnify you for all losses, costs and expenses arising in the course of performing the Project. This indemnity also extends to misuse or disclosure of any confidential information of your business, aspects of the project rights being in breach of any law and claims from a third party that it has intellectual property or moral rights which are, or will be, infringed by your use of the Project results. Subsequently, a worker will bear a significant risk in relation to defective work.

Provision of tools and equipment and payment of business expenses

40. 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.

41. 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.

42. 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.

43. Furthermore, 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.

44. The Project is not the type of work that requires a worker to provide much in the way of tools and equipment as it primarily the provision of labour. However, a worker is paid a monthly allowance for operational costs which is indicative of an employee/employer relationship.

Other indicators

45. In addition to the above, other indicators of the nature of the contractual relationship have been variously stated and have been added to from time to time. Those suggesting an employer-employee relationship include the right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of benefits such as annual, sick and long service leave and the provision of other benefits prescribed under an award for employees.

46. You have stated that workers are responsible for their own tax and superannuation obligations however, under the terms of the agreement you may terminate the agreement for any reason at any time by written notice.

Conclusion - common law definition of employee

47. Under subsection 12(1) of the SGAA, if a person is an employee at common law, that person is an employee under the SGAA.

48. 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 having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often 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 parties must be considered.

49. Based on the facts and evidence outlined above it has been concluded that your workers are employees under common law. Although we are not required to consider the expanded definition of employee under subsection 12(3) of the SGAA, we have included it for your convenience.

Expanded definition of employee for SGAA purposes

50. The expanded definition of employee within subsection 12(3) of the SGAA, which 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.

51. The words 'wholly or principally' are used to limit or restrict the types of contracts that will be covered by subsection 12(3). A contract that is partly for labour and partly for something else (for example, the supply of goods, materials or hire of plant or machinery), will only qualify if it is principally for labour.

52. 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.

53. Subsection 12(3) was intended to extend the scope of the SGAA beyond traditional employment relationships to take into account some independent contractors who principally provide their own labour to meet obligations under a contract, and was designed to include a person who may not be an employee in the normal sense but who is in fact not very distinguishable from an employee.

54. Paragraph 78 of SGR 2005/1 states that where the terms of the contract, in light of the subsequent conduct of the parties, 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 to delegate); and

• the individual is not paid to achieve a result,

then the contract is considered to be wholly and principally for the labour of the individual engaged, and he or she will be an employee under subsection 12(3) of the SGAA.

Remuneration for personal labour and skills

55. The worker signs an agreement with you to provide their labour and skills. Based on the terms of the agreement this is wholly and principally for labour and skills and no other goods or services.

Right to delegate duties

56. The agreement states that a worker cannot delegate their duties to others.

Payment to achieve a result

57. In accordance with the agreement a worker is paid a set amount for a maximum number of hours worked per month, regardless of the amount of work completed. This is not a result driven agreement

Conclusion - expanded definition of employee

58. Accordingly, as a worker satisfies all three components of the expanded definition under subsection 12(3) of the SGAA, they meet the expanded definition of an employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

59. Upon considering of all the available facts and evidence, the Commissioner is satisfied that with respect to work performed for you, a worker does meet the definition of an employee for the purposes of the SGAA under both common law and the expanded definition under subsection 12(3) of the SGAA. Accordingly, you have an obligation to pay superannuation contributions for the benefit of your workers.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

We followed these ATO view documents

Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee?

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