Edited version of your written advice

Authorisation Number: 1051272755913

Date of advice: 31 August 2017

Subject: Superannuation guarantee

Question 1

Was the Worker considered a common law employee of the Principal 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

Was the Worker an employee of the Principal by virtue of subsection 12(3) of the SGAA?

Answer

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

This ruling applies for the following period

1 July 2016 – 30 June 2017

This scheme commenced on

1 November 2006

We considered these to be the relevant facts

● The Worker was engaged by the Principal to facilitate implementation of a Management Plan for a state listed heritage site.

● The Worker was required to have their own insurance cover.

● The Worker worked under limited supervision.

● The Worker required their own motor vehicle, computer, telephone etc.

● The Worker was paid monthly for hours worked at the agreed rate.

● The Worker included travel expenses on the invoices.

● The Worker submitted a monthly invoice with a statement of achievements to the Principal.

● The contract was renewed yearly based on the Principal’s adopted budget.

● The Principal did not have any award entitlements to the worker.

● The Worker worked from home.

● The work was allocated to the Worker on an annual basis by the Principal’s Director of Compliance (Director).

● There was no formal written agreement or contract but the letters of appointment were used instead.

● The contract was renewed yearly but the letters of appointment were not issued annually.

● The job was initially advertised as a full time employment position but no one applied for the job thus the job was offered to the Worker and engaged as an independent contractor.

● The Worker generally controlled how, where and when they carried out the agreed duties.

● The Worker and the Director met every month for the monthly planning.

● The Worker has been operating a business and offered their service to others.

● The Principal had right to terminate the contract.

● The Worker could refuse to work or perform certain duties but this may lead to the early termination of the contract.

● The Worker could hire others for duties requiring specialised skills and qualifications such as an electrical work but required approval of the Director.

Reasons for decision

Why we have made this decision

Summary

The facts and evidence suggest that the Worker was an employee of the Principal 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. Therefore the Principal has an obligation to pay superannuation contributions on behalf of the Worker.

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

Was the Worker a common law employee of the Principal as defined in subsection 12(1) of the SGAA for the period from 1 July 2016 to 30 June 2017?

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 job was initially advertised as a full time employment opportunity but no one applied for it. Consequently the same job was offered to the Worker as a yearly renewable contract.

The Worker generally worked from her home and could choose when and how to do her work. The Worker and the Director met every month to set the tasks and duties needed to be done. The Worker was then required to submit the monthly statements of achievements reporting the completion of the agreed tasks. The Worker’s maximum annual payment was set by the Principal according to the allocated budget thus the Worker could only work up to a certain number of hours to keep the total payment within the Principal’s budget.

The Principal had right to terminate the contract. It was also stated that the Worker could refuse to work or perform certain duties but this may lead to the early termination of the contract. Therefore even though the Worker had some flexibility in the doing of the work, the Principal still had the ultimate authority to control. This is indicative of an employer/employee relationship.

A review of the invoices provided confirms that the Worker was registered for an ABN. It was stated that the Worker also has been operating a business and provided the service to others. However it is not clear if the Worker has provided services similar to the current contract duties to others.

Invoices were structured to show services charged at an hourly rate and entitlement for reimbursement, including travel expenses, as identified in the letter of appointment. This indicates the Worker was not engaged to produce a given result but simply for hours worked. This is consistent with an employer/employee relationship.

In the letters of appointment there was not a specific clause regarding delegation in respect to allowing the Worker to sub contract her work to another contractor. However the letters of appointment state that the Worker is responsible to the Principal at all times. Furthermore the Worker could only hire others for duties requiring specialised skills and qualifications with the Director’s approval. Therefore it appears that the Worker did not have ability to delegate the work to others and this indicates an employer/employee relationship.

The Worker was required to hold public liability insurance with certain minimum cover limit which indicates that the Worker was responsible for rectifying damages caused while performing her duties. This indicates a principal/contractor relationship.

Our conclusion regarding the common law definition of employee

The common law factors indicate the Worker was an employee of the Principal as the Principal held ultimate control in the relationship; the Worker was not paid for a result and were not able to delegate their work.

As the facts and evidence indicate that the worker was an employee of the Principal under common law, we are not required to consider the extended definition in subsection 12(3) of the SGAA. However, in order to leave no doubt as to the Commissioner’s view of this matter, the extended definition has been considered and is discussed below.

Question 2

Was the worker an employee of the Principal 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 Worker was paid primarily for their own labour and skills. The only other expense included in the remuneration was the travel expense paid to the Worker. However this payment was travel allowance calculated with the agreed rate per kilometre travelled in the course of providing the labour.

The individual must perform the duties themselves

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

Our conclusion regarding the expanded definition of employee

Accordingly, the facts and evidence indicate that the Worker also meets 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 the Principal and the Worker, the Commissioner concludes that the Worker meets the definition of an employee 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 Principal did have an obligation to provide superannuation support to the Worker in accordance with the SGAA for the period under review.

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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