Edited version of your written advice

Authorisation Number: 1051282356628

Date of advice: 4 October 2017

Ruling

Subject: Status of the Worker

Question 1

Are the Workers, who do not invoice the Principal through an interposed entity, considered common law employees of the Principal as defined by subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period?

Advice

Yes. Please refer to ‘why we have made this decision’.

Question 2

Are the Workers, who do not invoice the Principal through an interposed entity, considered employees of the Principal by virtue of subsection 12(3) of the SGAA for the period?

Advice

Yes. Please refer to ‘why we have made this decision’.

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.

We considered these to be relevant facts

You lodged a private ruling application for the Principal, requesting advice as to your superannuation guarantee (‘SG’) obligations in respect to the Workers.

You discussed the nature of the arrangement between the Principal and the Workers.

You provided further information by email regarding the arrangement between the Principal and the Workers, including the following attachments:

● A copy of a document outlining hourly payment rates for Workers engaged by the Principal.

● Copies of X invoices issued by separate Workers to the Principal for payment during the period.

● Copies of X invoices issued by the intermediary to the Principal for payment.

● A copy of a contract between the intermediary and the Principal (‘end-user’) for the business, including a client registration form signed and dated.

● A sample of an unsigned contract between the intermediary and The Workers engaged by the Principal.

You provided further information by email regarding the nature of the role of the Workers and the arrangement between the Principal and the Workers.

Based on the information provided, we considered the following to be relevant facts:

● The Workers are medical specialists who are engaged by the Principal through an intermediary to perform work as a specialist at a number of business locations.

● The Principal (‘end-user’) has an agreement with the intermediary which provides Workers to the Principal as required, and as per the requirements of a signed client registration form.

● The agreement between the Principal (‘end-user’) and the intermediary states the following:

● The intermediary locates and provides medical specialists for specific businesses.

● The agreement provides that the end-user will be the employer of the medical specialist.

● The end-user shall pay the intermediary a fee for the provision of the medical specialist.

● The intermediary issues invoices to the end-user for ‘placement fees’ for each medical specialist supplied through the intermediary. The placement fee includes GST.

● The Principal provides a handout outlining hourly payment rates for medical specialists engaged by the Principal to the intermediary to be provided to each medical specialist before accepting an engagement with the Principal.

● The handout states that the rates of payment are inclusive of all remuneration types, including superannuation and leave. The handout provides different rates depending on the location of the businesses, and set bandwidths for hours worked. The handout provides a ‘cents per kilometre’ rate for travel expenses.

● The sample of an unsigned contract between the intermediary and Workers engaged by the Principal states the following:

● The Worker has engaged the intermediary to find a position for the Worker as a relieving medical specialist.

● The Worker warrants and covenants that he or she is a qualified medical specialist.

● It is agreed between the parties that the intermediary is not the employer of the Worker, instead being engaged for the purpose of introducing the relieving medical specialist to prospective employment.

● When a suitable position has been found, the end-user will be the employer of the relieving medical specialist upon such terms and conditions as may be mutually agreed between the parties.

● The copies of X invoices issued by separate Workers to the Principal for payment during the period indicate the following:

● each of the invoices state the ABN of the entity invoicing;

● X of the invoices has been issued by a partnership;

● X of the invoices has been issued by a company;

● X of the invoices has been issued by a trust;

● X of the invoices have been issued under a trading or business name;

● X of the invoices include GST in the total amount payable; and

● each of the invoices demonstrate an hourly rate of payment referrable to the times worked at individual businesses, and a calculation using a ‘cents per kilometre’ rate for travel expenses.

● You have advised that the Principal is liable for all payments to the Workers, as per the invoices issued by the Workers.

● You have advised that the Workers have the right to refuse work with the Principal and have a choice whether to accept an engagement with the Principal through the intermediary. You have advised that the Workers perform services for multiple businesses not affiliated with the Principal.

● You have advised that if the Worker fails to attend work with the Principal, the Principal will contact the intermediary and the intermediary will provide the Principal with another worker.

● You have advised that if the Worker fails to perform work to an acceptable standard, has acted unlawfully or acts detrimentally to the Principal’s reputation, then the Principal can ask the medical specialist to leave the premises.

● You have advised that because the work is a specialist field, the Worker is only able to partially delegate work, as the final check before dispensing to a customer must be performed by the Worker. If the Worker is unavailable on a given day, a substitute medical specialist is arranged by the intermediary and not by the Worker themselves.

● You have advised that the Worker is subject to the direction and control of the Principal as to where, when and how the work is performed. The medical specialists report to other staff members to see what their duties or expectations are for that day, but they are not required to manage staff.

● You have advised that the Worker is provided with all the tools necessary to perform their duties by the Principal.

● The role of the Workers involves filling prescriptions as part of general day-to-day work, providing professional services to customers if needed (i.e. counselling and/or help with medications) and working as part of a team with other staff members.

● The Workers are not required to wear a uniform or any other form of identification (i.e. name tag or ID card) which identifies the medical specialist as being affiliated with the business.

● The Workers are required to comply with the Business Board/Guild guidelines, but they are not provided with the Principal’s Code of Conduct.

● The Workers are required to hold their own professional indemnity insurance, and this forms part of the arrangement between the intermediary and the Workers.

We formed our view on the facts by relying on this information

The private ruling application, telephone conversations, and further information provided by email.

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

1. The facts and evidence suggest that the Workers, who do not invoice the Principal through an interposed entity, are your 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. You therefore have an obligation to pay SG contributions on behalf of these Workers.

Detailed reasoning

2. 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).

3. 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? (SGR 2005/1) from a ‘contract for service’ which is typically a contractor and principal type of relationship and does not attract an SGC liability.

4. 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.

5. 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.

6. 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.

Is there a legal relationship between the Principal and the Workers?

7. The arrangement involves the use of an intermediary, referred to in this case as a ‘labour hire agency’, to supply Workers to the Principal as the end-user in the arrangement. This type of arrangement is referred to as a ‘tripartite employment arrangement’ in Superannuation Guarantee Ruling SGR 2005/2 Superannuation guarantee: work arranged by intermediaries (SGR 2005/2).

8. In this arrangement there is a contract between the intermediary and the end-user providing for the supply of Workers as medical specialists to the end-user, the consideration for which is a placement fee paid per medical specialist on a daily basis.

9. There is also a contract between the intermediary and the Workers, however there is no payment made by the intermediary to the Workers. The end-user is liable for all payments to the Workers, based on invoices issued by the Workers to the end-user for the work performed.

10. Paragraph 32 of SGR 2005/2 provides that when considering a tripartite employment arrangement, it is first necessary to determine whether a legal relationship exists for the performance of work and with whom it exists. Only after this has been established can consideration be given to the issue of whether the relationship is one of employment or of some other kind.

11. We note that the both the contract between the intermediary and the end-user, and the contract between the intermediary and the Workers, contain numerous clauses purporting to exclude the intermediary from any employment arrangement and specify that the end-user will be the employer any Workers engaged through the intermediary.

12. While the terms and conditions of the contracts assist in determining the character of the relationship between the parties, as per paragraph 33 of SGR 2005/2, ‘it is necessary to look beyond the form of the contractual relationships and the labels attached to the relationships by the parties to establish the true nature of the relationships of the parties involved’.

13. Paragraph 36 of SGR 2005/2 outlines the ordinary principles of contract law, being that a legally enforceable contract between the parties consists of three elements:

○ the parties must intend to be legally bound by their agreement;

○ there must be an offer by one party and its acceptance by the other; and

○ the promises which constitute the agreement must be supported by consideration (unless the agreement is in the form of a deed).

14. Paragraph 37 of SGR 2005/2 states that another way to ask this question is:

○ whom could the end-user sue for breach of contract (as distinct from negligence) if the worker failed to appear or failed to work at an acceptable standard; and

○ equally, whom could the worker sue for breach of contract if they performed their work but their remuneration was not paid to them?

15. There is no consideration supporting the agreement between the intermediary and the Workers. You have advised that the end-user is liable for all payments to the Workers, based on invoices issued by the Workers to the end-user for the work performed.

16. In the Full Federal Court case of Building Workers' Industrial Union of Australia and Others v. Odco Pty Ltd 20 (1991) 29 FCR 104 (Odco) at 114, it was held that ‘the element of consideration which is essential to a contract of employment is the promise by the presumptive employer to pay for service as and when the service is rendered’.

17. The invoices issued by the Workers to the end-user show an hourly rate of payment referrable to the times worked at individual businesses, and a calculation using a ‘cents per kilometre’ rate for travel expenses, at rates specified by the end-user in a handout outlining hourly payment rates for medical specialists engaged by the Principal.

18. These invoices therefore constitute the legal relationship between the end-user and the Workers, for the purpose of making payment in consideration for the work performed as a medical specialist.

19. The end-user is therefore the relevant entity (‘Principal’) for considering whether there is an employment relationship between the Principal and the Workers.

Question 1

Are the Workers considered your common law employees as defined by subsection 12(1) of the SGAA for the period?

Common law employee

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.

Terms and circumstances of the formation of the contract

20. 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.

21. 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.

Control

22. 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.

23. 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?

24. 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.

25. 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.

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

‘Results’ contracts

27. 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.

28. 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.

Whether the work can be delegated or subcontracted

29. 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.

30. 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.

31. 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.

32. 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.

Risk

33. 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.

34. 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.

35. 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

36. 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.

37. 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

38. The Workers are medical specialists who are engaged by the Principal through an intermediary to perform work as a pharmacist at a number of business locations.

39. The copies of X invoices issued by separate Workers to the Principal for payment indicate that some of the invoices have been issued through an entity other than the individual Worker (i.e. a partnership, company or trust).

40. As per paragraph 13 of SGR 2005/1, where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual.

41. Paragraph 14 of SGR 2005/1 provides that if a partnership has contracted to provide services, then the person who actually does the work is not the employee of the other party to the contract. This is so even if the worker is a partner and even if the contract requires the partner to do the work.

42. Paragraph 16 of SGR 2005/1 provides that a person who holds an ABN may still be an employee for the purposes of the SGAA. However, any Worker who has invoiced the Principal through a company, partnership or trust is not an employee of the Principal for the purposes of the SGAA.

43. X of the X copies of invoices have been issued by Workers under a trading or business name. Regardless of whether the invoice was issued by an individual or through an interposed entity, this is an indicator that these Workers intend to operate in an independent business of their own.

44. In addition, X of the invoices include GST in the total amount payable by the Principal. This is also an indicator that these Workers intend to operate in a business of their own, rather than within the business of the Principal.

45. Please note that this advice does not consider whether these Workers are carrying on an enterprise ‘in the form of a business’ for the purpose of making taxable supplies under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (‘GST Act’).

46. You have advised that the Workers perform services for multiple businesses not affiliated with the Principal. This can also indicate that the Workers are operating in a business of their own, and that they are able to generate goodwill through use of their specialist skills.

47. You have advised that the Workers are not required to wear a uniform or any other form of identification (i.e. name tag or ID card) which identifies the medical specialist as being affiliated with the business.

48. However, these factors are countered by the fact that the Workers will appear to be employees of the Principal while they are performing the work, and will therefore appear to be integrated into the business of the Principal.

49. The role of the Workers involves filling orders as part of general day-to-day work, providing professional services to customers if needed (i.e. counselling and/or general help) and working as part of a team with other staff members.

50. You have advised that the Workers have the right to refuse work with the Principal and have a choice whether to accept an engagement with the Principal through the intermediary.

51. You have advised that the Workers are required to comply with the Business Board/Guild guidelines, but they are not provided with the Principal’s Code of Conduct.

52. However, you have also advised that the Worker is subject to the direction and control of the Principal as to where, when and how the work is performed.

53. Paragraph 33 of SGR 2005/1 states that ‘a common law employee is told not only what work is to be done, but how and where it is to be done’. In accordance with paragraph 33 of SGR 2005/1, the Workers would be considered under the control of the Principal.

54. You have advised that because the work is a specialist field, the Workers are only able to partially delegate work, as the final check before dispensing to a customer must be performed by the Worker. If a Worker is unavailable on a given day, a substitute medical specialist is arranged by the intermediary and not by the Worker themselves.

55. This indicates that the Workers do not have a true right of delegation, and that the Workers are paid to perform the work personally through use of their specialised skills. The Workers are unable to delegate work to a replacement medical specialist themselves.

56. The copies of X invoices indicate that the Workers are not paid for a result, as they show a calculation of the amount payable based on an hourly rate and for travel expenses calculated on a ‘cents per kilometre’ basis.

57. You have advised that the Worker is provided with all the tools necessary to perform their duties by the Principal. This is generally an indicator that the Worker is a common law employee of the Principal.

58. You have advised that if the Worker fails to perform work to an acceptable standard, has acted unlawfully or acts detrimentally to the Principal’s reputation, then the Principal can ask the medical specialist to leave the premises.

59. The contract between the Principal and the intermediary contains a clause stating that the intermediary is indemnified against the actions of the medical specialist.

60. You have advised that the Workers are required to hold their own professional indemnity insurance, and that this forms part of the arrangement between the intermediary and the Workers.

61. Paragraph 51 of SGR 2005/1 states that an independent contractor will often carry their own insurance and indemnity policies. This indicates that the Worker bears the primary risk for any costs that arise from carrying out their services.

62. Paragraph 25 of SGR 2005/1 provides that the totality of the relationship between the parties must be considered to determine whether, on balance, a Worker is an independent contractor or an employee of the Principal.

63. In this situation, there are some factors that indicate the Workers could be in business for themselves but there are strong indicators, such as the integration of the Workers into the Principal’s business while they are engaged to work for them, the control the Principal has over the Workers, and the fact they are not engaged to produce a given result and cannot delegate, that mean, on balance, the Workers would be considered employees.

Our conclusion regarding the common law definition of employee

64. With respect to the relationship between the Principal and the Workers, the facts and evidence provided point to the conclusion that Workers who do not invoice the Principal through an interposed entity (i.e. a partnership, company or trust) are common law employees of the Principal.

65. As the facts and evidence indicate that these Workers are your employees 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

Are the Workers considered employees of the Principal by virtue of subsection 12(3) of the SGAA for the period 1 July 2015 to 30 June 2018 inclusive?

Expanded definition of employee for SGAA purposes

66. The expanded 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.

67. As per our advice at common law, the invoices issued by the Workers to the Principal constitute the legal relationship between the end-user and the Workers, for the purpose of making payment in consideration for the work performed as a medical specialist.

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

69. 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

70. 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.

71. 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.

72. Based on the available facts and evidence, we consider that the Workers were paid primarily for their own labour and skills as medical specialist pharmacists.

The individual must perform the duties themselves

73. As discussed earlier, the facts indicate that Workers do not have a true right of delegation, and that the Workers are paid to perform the work personally through use of their specialised skills. The Workers are unable to delegate work to a replacement medical specialist themselves.

Not paid to achieve a result

74. As discussed earlier, the copies of six invoices indicate that the Workers are not paid for a result, as they show a calculation of the amount payable based on an hourly rate and for travel expenses calculated on a ‘cents per kilometre’ basis.

Our conclusion regarding the expanded definition of employee

75. Accordingly, the facts and evidence indicate that Workers who do not invoice the Principal through an interposed entity (i.e. a partnership, company or trust) also meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion – overall

76. Upon considering of all the available facts and evidence, the Commissioner is satisfied that with respect to work performed for the Principal, the Workers who do not invoice the Principal through an interposed entity (i.e. a partnership, company or trust) meet the definition of an employee for the purposes of the SGAA under both the common law definition and the expanded definition provided under subsection 12(3) of the SGAA.

77. Accordingly, the Principal has an obligation to pay superannuation contributions for the benefit of these Workers under the SGAA.

78. However, note that the Principal is not required to pay superannuation contributions to a Worker who is paid less than $450 by way of salary or wages in a calendar month, as per subsection 27(2) of the SGAA.

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