Edited version of your written advice

Authorisation Number: 1051250552138

Date of advice: 21 July 2017

Subject: Superannuation guarantee

Question 1

Were the workers considered common law employees as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)?

Answer

Yes. Refer to 'why we have made this decision’

Question 2

Were the workers employees by virtue of subsection 12(3) of the SGAA?

Answer

Yes. Refer to 'why we have made this decision’

We considered these to be the relevant facts

● Workers are engaged under Contract for Service with the employer

● The Contract for Service identifies a worker as, “a person who is paid to do work wholly or principally of a domestic or private nature for not more than 30 hours per week”.

● The option for delegation did not result in the originating worker lodging an invoice for work done by another worker.

● The employer has the right to refuse a proposed replacement worker where the originally designated worker is unable to complete their shift.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 subsection 6(1).

Reasons for decision

Why we have made this decision

Summary

The facts and evidence suggest that the workers were employees for the purposes of the SGAA under both the common law definition and the expanded definition as set out in subsection 12(3) of the SGAA. The employer therefore has an obligation to pay superannuation contributions on behalf of the workers.

Detailed reasoning

The SGAA states that an employer must provide the required minimum level of superannuation support for its employees (unless the employees are exempt employees) or 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 or principally for their labour. This employment relationship is often referred to as a 'contract of service’. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? from a 'contract for service’ which is typically a contractor and principal type of relationship and does not attract an 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 expanded definition of 'employee’ in subsection 12(3) of the SGAA applies. If a worker is not an employee under subsections 12(1) or 12(3) of the SGAA, their status is described as an independent contractor and there is no SG obligation.

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.

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.

Question 1

Were the workers common law employees as defined in subsection 12(1) of the SGAA for the 1 October 2016 to 30 June 2017 inclusive.

Common law employee

Terms and circumstances of the formation of the contract

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.

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

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.

Even though the modern approach to defining the contractual relationship is to have regard to the totality of the relationship between the parties, control is still an important factor to be considered. This was recognised by Wilson and Dawson JJ in Stevens v. Brodribb ((1986) 160 CLR 16 at 36) (Stevens v. Brodribb), where they state:

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.

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

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.

The professional 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 skills 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.

'Results’ contracts

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.

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

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.

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 employee has merely substituted or shared the workload.

However, a clause in the contract may permit the worker to delegate the task to another worker subject to approval of the principal, as the principal may not want an unknown worker to be working on their site or who may not be suitably qualified.

Therefore, under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). A person who has a right to delegate work (whether or not that right is exercised in practice) does not work under a contract wholly or principally for their labour. Unless the contract expressly requires the service provider to personally perform the contracted services, the contractor is free to arrange for his or her employees to perform all or some of the work or may subcontract all or some of the work to another service provider.

Risk

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.

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.

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

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.

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.

Application of the law in these circumstances

In this case the workers were engaged via a written contract for service (the contract), in which it stated:

● “engagement” referred to private and domestic engagement and was defined in part as, “work relating to personally to the principal…”.

● the contractor is a person who is paid to do work wholly or principally of a domestic or private nature for not more than 30 hours per week”.

The contract specified aspects relating to what work was to be done, where the work was done and how the work was done. This indicates the employer had control over how the workers performed their duties and could direct them to stop one task and start another or direct them to complete a task in a specific way. This is indicative of an employer/employee relationship.

A review confirms that workers were registered for ABNs but that the majority worked only for one employer. Also evidence indicates the workers:

● registered for an ABN registration at a similar time to being engaged by principal

● have not lodged BAS statements

Invoices were structured to show services charged at an hourly rate and entitlements for allowances, including travel and administrative duties, as identified in the contract. This indicates the workers were not engaged to produce a given result but simply for hours worked. This is consistent with an employer/employee relationship.

In the written contract there was a specific clause regarding delegation in respect to allowing contractors to sub contract their shift to another contractor. We note the following:

● the use of a sub-contractor was simply choosing a name from a specified list of designated workers

● the sub-contractor was required to lodge their own invoice and receive direct payment for their work - there would be no involvement by the originally designated worker

● the employer retained the right to refuse a proposed alternate worker in the instance a rostered worker is unable to work their scheduled shift

As stated previously, the arrangement where the first worker chooses another worker to complete a shift and the second worker invoices for that work is considered substitution and not delegation under common law. This is consistent with the workers being engaged to work a set amount of hours and not to produce a given result and indicates an employer/employee relationship.

The workers were not responsible for rectifying faults within the employer’s home. Instead their only obligation was to report faults to Public Housing for correction. This is consistent with an employer/employee relationship.

Our conclusion regarding the common law definition of employee

With respect to the relationship between you and the workers, the facts and evidence provided points to the conclusion that the workers were common law employees of you.

Question 2

Were the workers your employees by virtue of subsection 12(3) of the SGAA?

Expanded definition of employee for SGAA purposes

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.

SGR 2005/1 explains when an individual is considered to be an 'employee' under section 12 of SGAA.

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.

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.

Wholly or principally for labour

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.

Based on the available facts and evidence, we consider that the workers were paid primarily for their own labour and skills.

Further there is no evidence that their remuneration was intended to cover any more than this as they were not required to supply any materials and had no significant ongoing expenses.

The individual must perform the duties themselves

As discussed earlier, we consider that the facts and evidence indicate that the workers did not have the right to delegate work to others.

Not paid to achieve a result

As discussed earlier, we consider that the facts and evidence indicate that the workers were not paid for a result.

Our conclusion regarding the expanded definition of employee

Accordingly, the facts and evidence indicate that the workers also meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

After considering all available facts and evidence relating to the working relationship between you and the workers, the Commissioner concludes that the workers meet the definition of employees for the purposes of the SGAA under both the common law definition and expanded definition as set out in subsection 12(3) of the SGAA. Therefore the employer did have an obligation to provide superannuation support to the workers in accordance with the SGAA for the period under review.

As the work the workers are engaged to perform is of a private or domestic nature, the employer is only obligated to provide superannuation support where both the following apply:

● the worker works more than 30 hours in a week; and

● the worker earns $450 or more in the calendar month

We took these laws into account

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

We considered the following case law

Stevens v. Brodribb (1986) 160 CLR 16

We followed these ATO view documents

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

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