Edited version of your written advice

Authorisation Number: 1051262536257

Date of Advice: 23 August 2017

Ruling

Subject: Status of the worker

Question 1

Was the Worker considered the common law employee of the Principal as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period 1 July 2013 to 30 June 2017?

Advice

No. Refer to ‘why we have made this decision’.

Question 2

Was the Worker an employee under subsection 12(3) of the SGAA by virtue of working under a contract that was wholly or principally for their labour?

Advice

No. Refer to ‘why we have made this decision’

This advice applies for the following period:

1 July 2013 to 30 June 2017

The arrangement commenced on:

1 July 2007

Relevant facts and circumstances

The Principal’s business operates under a company structure.

The Worker was initially employed as an employee.

The Principal paid Superannuation Guarantee (SG) for the Worker during that time to a nominated superannuation fund.

After a time the Worker advised that they wished to work under a contract because of other clients.

The primary role of the Worker focused on specialist skills.

The Worker has an Australian Business Number (ABN).

The Principal has been paying the Worker as a contractor for 10 years.

The contract agreement is verbal; there is no written contract.

The Principal believed the arrangement to be a contractor arrangement as per the result of completion of the SG Eligibility Decision Tool on the ATO website.

The Worker has recently claimed that SG should have been paid by the Principal.

The Worker negotiated a pay rate at the commencement of the contract; the Principal originally agreeing to pay an hourly rate on receipt of invoices from the Worker.

The Worker has the ability to negotiate a new rate which has risen approximately in line with the Consumer Price Index (CPI).

The Principal assumed the higher rate was to enable the Worker to take responsibility for superannuation contributions.

The Principal and the Worker agreed that the contract can be terminated with no notice or penalty.

The Principal does not engage any other workers to undertake the same role as the Worker.

Since the Worker commenced under the contract, the Principal has employed others to undertake the vacated role of the Worker.

The Principal has not provided any induction or ongoing training, instruction on how to complete tasks or manuals specific to the work undertaken.

The Principal has never set the hours or days that the Worker must work.

The Worker chooses their own working hours.

During a working week, the Worker is aware at the end of the day if there is, or will be, work to do the next day.

The Worker does not stay after finishing tasks, find other things to do around the office or come in if there is no work to do.

The Worker is not required to remain on the premises if specific work is not available, nor would the Principal consent to pay for hours beyond the agreed work.

The Worker is not formally required to attend meetings but can meet to consult with management.

The Worker is not entitled to paid breaks.

The Worker is aware of the duties to be performed and is able to decide what work is undertaken within that range on a day to day basis.

It is agreed that the Worker performs work at the premises of the Principal.

The Worker is not supervised but can consult with the Manager.

The Worker could refuse to undertake a task however this has never occurred as it would ultimately result in termination of the contract.

The Worker does not have to seek permission from the Principal for leave.

The Worker provides prior notice of any absences. The worker does not stay away for extended periods without prior notice.

The Worker is able to offer services to other businesses, has always worked for others and continues to do so.

Although the exact extent or frequency of work the Worker does elsewhere is unknown, the Principal is aware that the Worker has performed similar duties for other establishments.

The Worker undertakes duties alone and had sole responsibility for them.

The Principal has from time to time encouraged other employees to work with the Worker in order to learn from the Worker.

The Principal did not provide the Worker with a name badge, uniform, business cards or stationary promoting their business.

The Worker has their own business cards.

The Worker does not advertise their own business at the premises.

The Worker provides the Principal with a tax invoice approximately on a monthly basis.

Payment to the Worker by the Principal was not dependent on the completion of a certain task.

The Principal would not consent to pay The Worker for hours spent on tasks other than the agreed work.

The Principal does not perform any formal work checks prior to payment but is aware of the work performed by the Worker because it is undertaken in an office on the premises of the Principal.

The Principal made payments to the Worker’s bank account.

The Principal made no deductions for income tax, superannuation or other items from the payment.

The Principal reimbursed the Worker for expenses incurred in procuring items chosen for the workplace.

The Worker has never delegated her duties to another. If the Worker needed assistance with a task they would have to ask the manager if a staff member could assist.

If the Worker was absent for an extended period no one else did the work.

The Worker is responsible for paying workers compensation insurance, private accident insurance and other insurances.

Neither the Principal nor the Worker pays public liability insurance.

The work undertaken by the Worker does not require a personal guarantee.

The Principal provides the Worker with a laptop computer for use.

The Principal stated that the Worker was only paid to complete specific tasks.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

Reasons for decision

Why we have made this decision

Summary

The facts and evidence suggest that the Worker was not your employee for the purposes of the SGAA under either the common law definition or the expanded definition as set out in subsection 12(3) of the SGAA. You therefore did not have an obligation to pay superannuation contributions on behalf of the Worker.

In conclusion, there is no provision in the SISA or SISR which specifically prohibits the trustees of an SMSF from leasing a commercial property that meets the definition of BRP, from a member of the SMSF and on-leasing it to unrelated parties provided that the investment does not contravene the above investment restrictions of the SISA and SISR.

Detailed reasoning

The SGAA requires 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 extended 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 extended definition of employee under subsection 12(3) of the SGAA.

Question 1

Was the Worker considered your common law employee as under subsection 12(1) of the SGAA for the period

1 July 2013 to 30 June 2017?

Common law employee

In deciding whether an individual is a common law employee, there are a number of common law factors to consider.

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 consider whether the contract is written or verbal, and whether the terms and conditions are expressed or implied. When considering the intentions of the parties in forming the contract, it must be determined 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.

In this case the Worker was originally engaged as an employee. At a later date the Worker asked the Principal to change to a contractor arrangement because the Worker had other clients. There is no written contract; the Principal and the Worker have a verbal agreement.

The Worker was engaged in a different capacity and the old position was filled by an employee.

The Worker produced an Australian Business Number (ABN) and commenced invoicing the Principal. The Worker negotiated a rate of pay in excess of the rate received as an employee and became responsible for superannuation and insurance expenses.

Accordingly it is reasonable to conclude from these actions that the intention of the parties was to form a contractual relationship.

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. However 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.

Control is an important factor to be considered as recognised by Wilson and Dawson JJ in Stevens v. Brodribb ((1986) 160 CLR 16 at 36), 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.

In this case the Worker is able to choose their own working hours and does not have to seek permission from the Principal to take time off, however, The Worker can refuse to undertake a task but this would result in termination of the working relationship.

The Worker does not stay after the Worker has run out of specific tasks to do; the Worker does not look for other things to do around the office. The Worker is not entitled to paid breaks, is generally not required to attend office meetings and is not required to wear a uniform or other identifier of the Principal. These circumstances, and the fact that the Principal does not direct or supervise the Worker, are indicative of a contractor relationship.

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

In Hollis v. Vabu Pty Ltd, the following statement by Windeyer J in Marshall v. Whittaker's Building Supply Co was quoted:

... the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.

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.

The professional skills involved in carrying out the work are 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.

Consideration may also be given to whether the worker could be expected to generate goodwill in their own right.

In this case the Worker has an ABN and a specialised skill which the Worker is able to offer to other businesses. During the period of engagement the Worker has always worked for others, continues to do so and has the capacity to generate goodwill in the Worker’s own right.

The Worker had a business card and contact information and is not required to promote the business of the Principal.

The Worker was involved in some duties which were similar to employees of the Principal and occasionally worked with them. Though in isolation this is more indicative of an employee role, when considering all the conditions around the working relationship, it is reasonable to conclude that the Worker operated their own business separate to the business of the Principal.

‘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 just 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.

Where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for services. In contracts to produce a result, payment is often made for a negotiated contract price, as opposed to an hourly rate. The consideration is often a fixed sum on completion of the particular job. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

In this case the Worker listed specific services on invoices presented to the Principal.

The Worker did not merely attend the office solely to provide expertise and then proceed to other clients to perform the same independent service.

The Worker is paid an hourly rate to perform tasks.

Further, the Worker has undertaken this role for the Principal, attending the premises on a frequent and regular basis, for the last 10 years.

This type of arrangement is more indicative of an employer/employee relationship.

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'). 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.

If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor.

In this case the Worker performed the work personally in practice and if the Worker was absent, the work was held over until the Worker’s return. Although the issue has never arisen, the Principal has stated that they would be reticent to allow another entity to undertake the tasks of the Worker unless they were well known and of equal credentials. Therefore, there may have been scope for delegation, and as there is no written contract, this factor remains indeterminate.

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.

In this case both the Worker and the Principal hold insurances, except for public liability insurance. The nature of the work, whether it be performed by the Worker as a contractor or an employee, does not in itself expose the Worker to the risk of negligence, injury, faulty work or loss of profit. This factor is therefore indeterminate in this case.

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.

In relation to tools, provision of equipment and expenses in this case the Worker incurs little to none of these either in work done for the Principal or for other businesses for which The Worker works. Therefore this factor is indeterminate.

Our conclusion regarding the common law definition of employee

With respect to the relationship between the Principal and the Worker, the facts and evidence provided points to the conclusion that the Worker was not a common law employee of the Principal.

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

Question 2

Was the Worker your employee under subsection 12(3) of the SGAA?

Expanded definition of employee for SGAA purposes

The extended definition of employee within subsection 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.

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 facts and evidence indicate that the Worker was paid primarily for their own labour and skills. There is no evidence that remuneration was intended to cover any more than this as the Worker was not required to supply materials of any substantial nature and had no significant ongoing expenses.

The individual must perform the duties themselves

As stated earlier, because the agreement between the Principal and the Worker did not specify whether delegation was allowed and the issue never arose in practice, this factor is inconclusive.

Not paid to achieve a result

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

Our conclusion regarding the expanded definition of employee

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 - overall

Upon considering of all the available facts and evidence, the Commissioner confirms his original decision and is satisfied that with respect to work performed for the Principal, the Worker does not meet the definition of employee for the purposes of the SGAA under either common law or the expanded definition provided under subsection 12(3) of the SGAA. Accordingly the Principal did not have an obligation to pay superannuation contributions for the benefit of the Worker under the SGAA.

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