Edited version of private advice

Authorisation Number: 1051779132712

Date of advice: 15 December 2020

Ruling

Subject: Employee vs contractor

Question

Is there an obligation to withhold from payments made to your workers under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The workers are engaged to provide services on an ad hoc, business needs basis.

Using your app-based technology solution, workers are offered shifts and are able to book, amend length or reject shifts based on their availability and desire to work for you, typically one month in advance.

The app identifies the available work for the next month. The app is specific and focused on each individual job. Once accepted, jobs are viewable in a fashion whereby users are provided a list of jobs to complete during the chosen shift.

The nature of the business required that appointments be arranged with a fair degree of accuracy in advance, and are therefore allocated to workers once they have chosen to accept a shift although there is an ability for the worker to re-schedule an appointment directly with the client should the need arise.

Workers are free to 'book' as many or as few shifts as they like. Workers can choose to request shifts on a regular default schedule through your app-based technology solution.

Workers use their discretion to decide whether or not to accept a block of jobs, which due to the nature of the business are arranged into a shift, to fit into their lives as they see fit and to determine the time when the jobs are done. As a result, the worker sets their own times of work.

Workers change their schedules often. There are also a number of workers who will set their shifts for a month and generally not make any changes

Each job has a value based on the suburb and zone it is located in. Users can negotiate non-standard rates with your office staff.

If a shift is not accepted it goes back into a pool for other workers to pick up. Work will not be arranged for the worker until they have accepted to work a shift. You release work schedules a day or two in advance.

If, upon release of the schedule, a worker does not want to work the previously assigned shifts, they are free to arrange for an alternative worker to complete the shifts on their behalf.

If the worker is unable to complete the jobs, and is not able to successfully delegate the work, they will not be paid. You will then make appropriate arrangements to have the work rescheduled.

If work is not completed, the worker re-attends to complete the work at his or her own expense.

The workers are permitted to, and occasionally do, subcontract or delegate work. The subcontractor/delegates need to be approved by you and needs to have proper accreditation.

The delegation of work is used when a worker chooses not to work a shift that they have previously requested. Because workers are completely free to choose whether to select a shift, and typically then arrange their affairs accordingly, and because all shifts are completed in a short finite time, it is relatively unusual for delegation to happen in practice.

Workers delegate in a number of different ways. One way is communicating with one-another via a messenger service. You do not control this group. These discussions around delegation can commonly take place up to the day before or day of relevant jobs

In principle a worker who agrees to undertake work for you, but who also runs his own business (for example), could elect to delegate a shift or a number of shifts to someone who works with them or has done so in the past (subject to the qualification conditions).

The workers are permitted to reject work.

The workers can dictate when and whether they will carry out the services required.

The workers are not permitted, without written consent from you, to provide any services to or for any person or entity that has an interest which directly or indirectly competes with you.

Any items which are necessary for the proper execution and completion of the services (and not available from you) can be purchased from you or may be provided by the worker at their own expense.

Tools are bought outright direct from a preferred supplier or through you.

You will provide all incidentals such as branded stock.

Any other items which are necessary for the proper execution and completion of the services (and not available from you) must be provided by the worker at their own expense.

Certain categories of workers will invoice you with 30 day terms at the beginning of the month following the month in which the Services were provided, detailing the number/type of Services provided.

Fees for some categories of worker are calculated on a 'per job' basis according to the geographical location of the job. Other workers are paid on a per hour basis.

The worker will provide his/her services at his/her own cost and will not be entitled to reimbursement for any out of pocket expenses unless expressly authorised by you.

The worker has no authority to incur any obligation or expense on your behalf except with the written approval of the business.

The worker is solely responsible for the manner in which he/she provides their services. In order to ensure a quality service is provided, periodic training is provided to workers.

The worker is expected to take out and maintain Public Liability Insurance and Salary Continuance Insurance/Personal Accident Insurance.

The workers must rectify any damage caused by them in the course of providing the services.

All workers working for you must wear your uniform.

The purpose of the uniform is primarily to give customers confidence that they are dealing with the individual they expected to be dealing with when they come to a home to complete a task. The wearing of the uniforms by the workers is to ensure that the members of the public can be assured the worker has the requisite technical knowledge and standards required to do the work.

All workers are required to provide an ABN. All workers agree to undertake unpaid training followed by a written examination.

You work to provide a reasonable minimum number of jobs to workers per day. If you are unable to provide that to the worker, the worker is able to increase the job rate of the remaining jobs equivalent to the total of the guaranteed minimum at the original rate.

Superannuation is currently paid by you on behalf of workers, even though you do not believe there is a statutory obligation to do so. Current contracts typically indicate that superannuation will be paid "at the request of the contractor".

There is a clause in the agreements which states:

The Contractor must not without the prior written agreement of the Business, provide any services to or for any person or entity who or which has an interest which is directly or indirectly in competition with the Business.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

A determination of whether an individual under a specific arrangement is an employee must be made by a consideration of the total factual circumstances in light of all of the indicators determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

These indicators include:

•         The control test: The degree of control which the payer can exercise over the payee.

•         The organisation or integration test: Whether the worker operates on their own account or in the business of the payer.

•         The results test: Whether the worker is free to employ their own means and is paid to achieve the contractually specified outcome.

•         The delegation test: Whether the work can be delegated or subcontracted (with or without the approval or consent of the principal).

•         The risk test: Whether the worker bears the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

•         Which party provides tools, equipment and payment of business expenses?

Control

The test for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done. The importance of control lays not so much in its actual exercise as in the right of the employer to exercise it.

A high degree of discretion or latitude in the manner in which a task is performed does not, of itself, indicate a contract for services.

Further, although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment relationship. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements any control or direction must be expressed in terms of the contract only, otherwise the contractor is free to exercise their own discretion, because they work for themselves.

In this case, the workers are not to provide services for any other person or entity who is directly or indirectly in competition with you and if a worker could not attend to a job they could only delegate to other workers who are permitted to carry out the work. These factors indicate that a level of control existed over the workers which is indicative of an employee/employer relationship.

Organisation or integration

In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payer's business, but the work is not integrated into the business rather is an accessory to it.

In this case the workers are required to attend training and pass an exam before they are permitted to begin working and they can only delegate work to other workers who satisfy these requirements. The workers are also required to wear your uniform identifying that they are performing work for you. The facts point towards the workers worked within your business which indicates that an employee/employer relationship existed.

Results

Where the substance of a contract is for the production of a given result, there is a strong indication that the contract is one for services.

'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 specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. 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 fees for some categories of worker are paid on a per-job basis whereas the fees for the other categories of worker are paid at a set rate per hour. Additionally, each job has a value based on the suburb and zone it is located in. This factor is neutral.

Delegation

The power to delegate or subcontract 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.

Whereas if an individual has unfettered power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. The contractor is free to arrange for their employees to perform all or some of the work or may subcontract all or some of the work to another service provider. In these circumstances, the contractor is the party responsible for remunerating the replacement worker.

A common law employee may frequently 'delegate' tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this 'delegation' exercised by an employee is fundamentally different to the delegation exercised by a contractor outlined above. 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 workers have merely organised a substitution or shared the workload. This is not delegation consistent with that exercised by a contractor.

In this case, while the workers are able to delegate work, the delegates are required to be approved by you and have the proper accreditation. This effectively limits the delegation to the other workers and is more akin to substitution. This indicator leans towards an employee/employer relationship.

Risk

An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies.

Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor.

Commonly, an independent contractor or entity would solely bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense.

An employee on the other hand, would bear no such responsibility and the liability for any defective work of the employee, either to a third party or otherwise, would fall to the employer in terms of the burden of cost or time for rectification.

In this case, the workers are expected to take out and maintain Public Liability Insurance and Salary Continuance Insurance/Personal Accident Insurance. They are also required to rectify any damage caused by them in the course of providing the services. These factors indicate a principal/contractor relationship.

Provision of tools and equipment and payment of business expenses

The provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

However, the provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor.

There are situations where very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work.

Further, an employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car.

It is acknowledged that in your case the workers are to provide their own tools, however you provide the workers with all equipment and stock. This factor is indicative of an employee/employer relationship.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that the workers are employees and not independent contractors. As a result, you are obliged, as the employer, to withhold from payments made to the workers under section 12-35 of Schedule 1 of the TAA.

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