Edited version of your written advice

Authorisation Number: 1051415226900

Date of advice: 24 August 2018

Subject: Status of the worker

Question 1

Was the Worker considered your common law employee as under subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period ended 30 June 2018?

Answer

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

Question 2

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

Answer

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

This advice applies for the following period:

Period ended 30 June 201Y

The arrangement commences on:

1 July 201X

Relevant facts and circumstances

Terms and the circumstances of the formation of the contract

● Both the Principal and the Worker agree that the relationship was based on a verbal agreement and there was no written confirmation.

The Principal advised that:

● the Worker was contacted regarding their availability when an overload occurred

● the Worker could renegotiate pay and conditions,

The Worker advised that:

● they were engaged casually at an hourly rate under their ABN and they were to invoice the Principal at the end of each day for hours worked

● they were unable to negotiate pay rates and conditions

● they were unsure about whether they could be terminated.

Control

The Principal advised that:

● no training was provided to the Worker

● there were no set hours and payment was based on invoices raised on conclusion of a job

● the Worker attended client meetings with the Principal

● there were no paid breaks

● after acceptance of the job, the Worker was advised of work completion dates and once on site determined what sequences or priority was required for each job

● direction was only given in relation to the location(s) of work either at the client’s premises or at the Principal’s premises

● the worker was always able to say yes or no to any job offered

The Worker advised that:

● verbal instructions were given as to how the job was to be undertaken and on the job training was provided from time to time

● the Principal usually advised via text or phone when the Worker was required to work

● no attendance at meetings was required, breaks were often paid for unless it was a dedicated 30 min lunch break which was not invoiced, and a plan for the days tasks was required to be followed

● they were told which job was to be done and in what order and on most jobs the Principal or their child, a full time employee, were always present

● they were unsure whether they could refuse a particular job or task as the need never arose

they would let the Principal know in advance what days they were unavailable so the Principal could reschedule or seek other assistance.

Integration

The Principal advised that:

● the Worker would accept work from several other businesses

● the Worker did not work alone – they worked alongside the Principal’s workers and at times with other people that were with the companies the Principal was working for.

● the Worker was provided with a logo shirt that showed their name, however this was not required to be worn – the Worker did not have their own badge, clothing business cards or other items promoting their business

● the Worker did not use their own vehicle and would drive from their residency to the factory/warehouse

● the worker did not advertise their business on any of the assets/tools they used.

The Worker advised that:

● they did not advertise their services but they could work for others.

● they worked on their own for only 1 or 2 jobs a year – usually they worked with the Principal and their child

● they did not train supervise or assess the work of others

● they did not have a badge, clothing or business cards promoting their own business/services and was required to wear a black shirt featuring their embroidered name and the Principal’s logo

● all the equipment they used was branded with the Principal’s logo – they did not advertise their business on any of the assets/equipment/tools used.

Results

The Principal advised that:

● the Worker provided an invoice once the job had been completed and payment was paid on receipt of this invoice – the invoice clearly states that the required task was completed

● the Worker’s payment was dependent on the completion of a task/job

● formal checks were not required re completion of work as the Worker worked alongside either the director or technician

● the Worker was not reimbursed for anything other than work they completed - no deductions, inclusive of those for income tax and superannuation, were made

The Worker advised that:

● they submitted invoices every few days for hours worked

● the Principal set the fees for work done – on one or 2 occasions they were offered a higher hourly rate to work News Year’s Eve or a public holiday

● if they worked an 8 hour day and the job was not completed they would still invoice for that day and be paid even if they did not return to finish the job

● payments were made into their bank account

● one rare occasions when they used their own vehicle the Principal would take them to a service station and put fuel in their vehicle.

Delegation

The Principal advised that:

● the Worker was not given specific instructions about whether they were to complete the work personally

● if the Worker was absent, work would be re-arranged as if they were on holidays, or the job would not be accepted or picked up by us if needed

● the Worker did not have employees but they had the option to provide another person to perform the tasks if necessary, although it didn’t ever happen.

The Worker advised that:

● it was never communicated that they could allow someone else to complete the work and they were usually in the company vehicle when travelling to job sites and back

● when they were absent sick or on holidays the Principal and their child would arrange for completion of work and/or call in other casuals as required

● they were unable to organise the work or tasks by others.

Risk

● the Worker and the Principal advised that workers compensation and private accident insurances were held by the Worker

● both the Principal and the Worker held public liability insurance.

● no evidence was provided that any claim was made under any of the insurance policies

● both parties agreed that the Worker’s work was not required to be guaranteed for any period of time

● the Principal advised that, although it never happened, the Worker was responsible for correcting defective work in their own time and paying for associated materials and breakage – the Worker advised that they did not have this responsibility

Provision of tools and equipment

The Principal advised that:

● the Worker was not required to use their own transport - the Principal’s van was used to transport materials/equipment

● the Worker was reimbursed on one occasion for unspecified assets equipment or tools

● all materials were arranged and supplied by the Principal

● the Principal supplied protective work gear in the form of ear plugs and safety glasses

● the Worker was to provide their own shoes/safety boots

The Worker advised that:

● they did not supply their own assets, equipment or tools and as such was not reimbursed by the Principal for the same

● the Principal decided what materials/equipment were required for a job and arranged delivery to the job

● they were required to supply and wear safety boots

Reasons for decision

Why we have made this decision

Summary

The facts and evidence suggest that the worker was your employee for the purposes of the SGAA under both the common law test and the extended definition as set out in subsection 12(3) of the SGAA. You therefore have an obligation to pay superannuation contributions on behalf of the worker.

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 your common law employee under subsection 12(1) of the SGAA for the period late August 201X to early February 201Y?

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

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, 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

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.

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

‘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.

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.

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.

In your case

The Principal and the Worker formed a relationship which was not based on any written agreement. The Worker’s acceptance of being engaged at an hourly rate under his Australian Business Number (ABN) and to invoice the Principal is indicative of a principal/independent contractor relationship.

On this basis of the formation of the relationship, it appears that it is reasonable to consider that each party could reasonably conclude from the actions of the other that a principal/independent contractor relationship was intended. However, under paragraphs 27-31 of Superannuation Guarantee Ruling SGR 2005/1 – Superannuation guarantee: who is an employee? the characterisation of a relationship between the parties needs to be examined against the true nature of the relationship. That examination will take the form of a consideration of various common law tests as follows.

On acceptance of a job the Worker was advised of completion dates and whether the work was to be performed at the Principals premises or at a client’s location. For the most part the Worker was working with the Principal/director and or a technician.

Evidence provided was inadequate in terms of determining the Worker’s skill level and the associated level of control required to complete jobs to the satisfaction of the Principal, however as it was the Principal who won the jobs and was using the Worker as part of a team to complete the jobs, it is reasonable to conclude that the Principal had some scope for the actual exercise of control.

The Principal advised that the Worker was able to say yes or no to any job offered, however in the context of this relationship and the absence of any evidence that jobs were rejected to any great extent, the consideration of control is focussed more on what occurred when jobs were accepted rather than on the Principal’s lack of control in which jobs the Worker would accept.

The question arises as to whether the Worker was working in their own business or was working in the Principal’s business. The integration into the Principal’s business is apparent in relation to the Principal providing the Worker with a shirt featuring the Principal’s logo and the Workers name. Effectively, when the shirt was worn the Worker was presented to clients as emanations of the Principal’s business as referred to in On Call at [271]. The Principal and the Worker disagree as to whether the shirt was required to be worn.

The Principal advised that the Worker would accept work from several other businesses and this impacted on their availability. Detailed evidence of this alternative work was not provided by either party. However, as stated in On Call at [285] a worker who provides their services to multiple organisations can still be an employee of any of those organisations.

The Worker did not advertise their services on clothing or tools did not have promotional or business cards and brought no significant assets to the working relationship.

On consideration of these integration aspects it is more likely that the Principal rather than the Worker would usually receive the goodwill generated from the client satisfaction with the Worker’s services, as referred to in Hollis v. Vabu at [48].

The Principal paid the Worker on the basis of invoices submitted. The invoices were all based on an hourly rate and itemised in relation to specific jobs. The Principal advised that the Worker’s payment was dependent on the completion of a task/job. In contrast the Worker advised that if he worked an 8 hour day and the job was not completed he would still invoice and be paid for that day.

The Worker was paid for some jobs on a progressive basis rather than on the basis of a result, being job completion to the satisfaction of the Principal.

As detailed under paragraphs 42-44 of SGR 2005/1 the phrase ‘the production of a given result’ means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specific outcome. The relationship in this instance is based more around the Worker integrating with the Principal’s employees and using the Principal’s assets to provide their service and as such does not align with this freedom.

The informal manner on which the working relationship was formed and operated resulted in an absence of any express terms in respect of delegation. Both the Principal and the Worker operated under conditions such that if the Worker was unavailable jobs would be picked up by the Principal’s employees or alternatively were rejected.

The Worker confirmed that when they were absent, the Principal and their employee would arrange for completion of the work and/or call in casuals as required. This contrasts to the situation where a contract for services is operating with the emphasis being on the performance of the agreed services/achievement of the result and the service provider has the ability to subcontract all or some of the work to another service provider and pay that provider.

In summary, no evidence was provided to support the existence of delegation and in the absence of delegation actually occurring the impact of this element on a determination of the Worker’s status is diminished.

Both the Principal and the Worker held public liability insurance and it was agreed that the Worker held his own workers compensation and private accident insurance. Both parties agreed that the Worker’s work was not required to be guaranteed for any period of time. The Principal advised that the Worker was responsible for correcting defective work – this was not the Worker’s understanding.

The Worker did not quote for each job but rather accepted the job and then invoiced for their time at a set hourly rate. Under this type of arrangement the chance of profit and the risk of loss do not reconcile with the chance and loss profile of an independent contractor quoting on jobs at rates to recover overheads and conducting their own business. The Principal leased or owned a commercial property associated with the business, sourced the materials required for jobs and managed the associated logistics using the business vehicle. On the other hand, the Worker brought minimal assets to the working relationship and was provided with incidental protective/safety items excluding footwear.

In summary, although the terms of engagement indicated a principal/independent contractor relationship the control exercised by the Principal, the integration of the Worker, the basis on which the Worker was paid, the non-occurrence of delegation, and the Worker’s low risk profile and comparative lack of assets brought to the working relationship, support recognition of an employer/employee relationship.

Our conclusion regarding the common law definition of employee

With respect to the relationship between you and the Worker the facts and evidence provided points to the conclusion that the worker was a common law employee of the Principal.

As the facts and evidence indicate that worker was your employee 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 your employee under subsection 12(3) of the SGAA?

Extended 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 worker was paid primarily for their own labour and skills. There is no evidence that their remuneration was intended to cover any more than this as they were not required to supply any equipment/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 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 extended 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 you and worker, the Commissioner concludes that worker meets the definition of an employee, for the purposes of the SGAA under both the common law test and extended definition as set out in subsection 12(3) of the SGAA. Therefore you did have an obligation to provide superannuation support to worker in accordance with the SGAA for the period under review.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

We considered the following case law

On Call Interpreters and Translators Agency Pty Ltd v. Federal Commissioner of Taxation (No 3) [2011] FCA 366.

Hollis v. Vabu (2001) 207CLR21.

ATO view documents

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

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