Edited version of your written advice

Authorisation Number: 1013074329502

Date of advice: 28 September 2016

Ruling

Subject: Status of Worker

Question

Will the worker paid by your entity be considered to be an employee in accordance with section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

No. Refer to 'Why we have made this decision'.

This advice applies for the following period:

Income year commencing 1 July 2015

The arrangement commences on:

July 2015

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

1. A copy of the unsigned draft agreement has been provided, the draft agreement outlines the proposed terms of the relationship which are detailed below.

2. The agreement is for provision of services that was negotiated at arm's length.

3. The agreement commenced on July 20XX.

4. The agreement is able to be terminated by either party on X weeks' notice.

5. Although not determinative;

(a) The agreement specifically states that the relationship is one of principal and independent contractor

(b) The agreement contains a number of other clauses which are indicative the worker is not an employee

(c) The worker asserts he/she is not an employee

6. The worker is a sole trader and issues invoices for services provided at a set rate.

7. The invoices are issued under the worker's ABN

8. The worker is not registered for GST.

9. The worker performs the tasks and provides the services which are listed in the agreement

10. The worker is not directed how or when to do those tasks by your entity.

11. The worker uses their own discretion to determine how best to perform the tasks and duties required of them.

12. The worker can engage subcontractors to assist them.

13. The worker performs the work on the premises, but is conducting their own business.

14. The agreement is a contract to produce the result that specific records will be created and kept to ensure your compliance with various statutory obligations

15. The worker has contracts for services with other clients. This is specifically provided for by the agreement.

16. In a calendar month, the worker provides services to your entity for approximately Y days. These days are spread out to be a regular day per week and an additional day per month or as required.

17. The work is performed on the premises and the worker uses equipment provided by your entity.

18. The worker provides their own insurances.

19. The agreement is subject to termination by notice by either party.

20. The worker is not entitled to annual leave, sick leave or long service leave.

You have also made the following statements:

21. The agreement between the worker and your entity has not been signed /executed as you are waiting for further external advice.

22. You advised the worker has had the opportunity to arrange for another worker to replace them. This was a result of the worker taking holidays.

23. You advised the replacement issued an invoice to the worker and the worker in turn invoiced your entity.

Reasons for decision

Summary

24. Work performed in accordance with the terms of the agreement will not result in the worker being an employee under either the common law definition or the expanded definition as set out in subsection 12(3) of the SGAA. Therefore, your entity will not have an obligation to pay superannuation contributions on behalf of this worker.

Detailed reasoning

Ordinary meaning of employee

25. 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).

26. 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.

27. 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. No one indicator is in itself determinative of the relationship. These indicators are discussed below.

Terms and circumstances of the formation of the contract

28. The fundamental task with respect to the terms of engagement test is to determine the nature of the contract between the parties. We must determine the nature of the contract between the parties, consider whether the contract is written or verbal, and whether the terms and conditions are expressed or implied. These factors are important in characterising the relationship between the parties.

29. When considering the intentions of the parties in forming the contract, the task is to decide what each party could reasonably conclude from the actions of the other. Simply defining someone as a contractor does not necessarily lead to the conclusion that the individual is providing services as part of an operation of their own independent business.

Control

30. The extent to which the engaging entity 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. With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lays not so much in its actual exercise, but in the right of the employer to exercise it.

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

31. If the worker's services are an integral and essential part of the business that engages them (under a contract of service), 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 (under a contract for services), they are an independent contractor. 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.

'Results' contracts

32. 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 their own means (that is, third party labour, plant and equipment) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

33. Satisfactory completion of the specified services is the result for which the parties have bargained. That is, a payment becomes payable when, and only when, the contractual conditions have been fulfilled. Payment is often made for a negotiated contract price, as opposed to an hourly rate.

Whether the work can be delegated or subcontracted

34. The power to delegate or subcontract (in the sense of the capacity to engage others to do the work) 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.

Risk

35. Generally speaking, employers are vicariously liable for negligence and injury caused by their employees, whereas a principal will not be liable for negligence or injury caused by an independent contractor.

36. Another consideration of risk is the liability for the cost of rectifying faulty work. That is, the key underlying consideration is whether the individual is exposed to commercial risk in terms of a liability to cover the cost of rectifying defective work.

37. This is consistent with the focus on the chance of profit and the risk of loss as a traditional indicator that a worker is an independent contractor conducting their own business.

Provision of tools and equipment and payment of business expenses

38. A worker/payee who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required to complete their work by the employer. Furthermore, the employer is often also responsible for the business expenses incurred by the worker, since the worker has been integrated into the employer's business.

39. Independent contractors carrying on their own business often provide and pay for their own assets, tools, equipment, maintenance costs and other expenses. Usually, they will have factored these costs in their overall fee or they will seek separate payment for such expenses from the principal.

In your case

40. With respect to the relationship between your entity and the worker, the main indicators from above which are considered the most important in the consideration that the worker is not a common law employee of your entity are:

(a) The worker is operating their own business, they have contracts engaging other clients and it therefore not considered to be part of your entity;

(b) They are able to complete tasks in a manner that they deem appropriate with no direction on how or when by your entity. They use their own discretion to determine how best to perform the tasks and duties required;

(c) They are free to employ their own means to achieve the outcomes specified by your entity;

(d) This is evidenced by the fact that the worker has the power to delegate or engage another person to perform the work and has actually exercised this power rather than it only being implied.

41. As the facts and evidence indicate the worker is not an employee under common law, we are required to considered the expanded definition of employee under subsection 12(3) of the SGAA

Employee under subsection 12(3) of the SGAA

42. The Commissioner's view, as expressed in SGR 2005/1, is that some contracts for service will be wholly or principally for labour of the individual contracted even though the individual is not a common law employee.

43. As the facts and evidence indicate the worker was your employee under common law, we are required to consider the expanded definition under subsection 12(3) of the SGAA and this is discussed below.

44. 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.

45. 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.

46. 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.

47. 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.

48. 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.

In your case

49. As stated previously, the worker performs the work on your premises, uses equipment provided by your entity, the agreement is a contract to produce a result, the agreement allows the worker to engage subcontractors to assist. During a telephone call between a representative of your entity and an external agency, your representative advised that the worker A had engaged another worker B to replace them while they were on annual leave. Your representative was asked how the replacement worker B was paid. They advised the replacement worker B invoiced the worker A, who in turn invoiced your entity.

50. Accordingly, as the worker does not satisfy all three components of the expanded definition under subsection 12(3) of the SGAA , they do not meet the expanded definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - whether the worker is an employee

51. Upon considering all of the available facts and evidence, the Commissioner is satisfied that with respect to work performed the worker does not meet the definition of an employee for the purposes of the SGAA under either common law or the expanded definition under subsection 12(3) of the SGAA. Therefore, your entity does not have an obligation to pay superannuation contributions for the benefit of the worker.

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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