Edited version of private advice

Authorisation Number: 1051783893840

Date of advice: 2 December 2020

Ruling

Subject: Status of worker

Question 1

Is the Worker an employee of the Principal according to subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)?

Answer

No

Question 2

Is the Worker your employee by virtue of subsection 12(3) of the SGAA?

Answer

Yes

This advice applies for the following periods:

1 July 2012 - 30 June 2013

1 July 2013 - 30 June 2014

1 July 2014 - 30 June 2015

1 July 2015 - 30 June 2016

1 July 2016 - 30 June 2017

1 July 2017 - 30 June 2018

1 July 2018 - 30 June 2019

1 July 2019 - 30 June 2020

The arrangement commences on:

March 2013

Relevant facts and circumstances

The Principal operates a Yoga studio where classes are run to teach and practice yoga.

The Yoga studio is a "hot yoga' business.

This type of yoga is characterized by a set series of posture and breathing exercises performed in a heated room. Each teacher has a set dialogue which they have to resit for each class, no variation, no class set-up, no interaction with the students, no physical contact, no labour, no mental effort or no artistic effort.

The Worker was engaged with the Principal for X years.

No formal contract was in place.

The Principal engages instructors by advertising through social media, word of mouth and email.

The Worker was required to have qualifications in "Bikram Yoga". The Worker was given the job with the studio because they had this qualification.

The studio offers a number of classes per week of varying lengths.

This Worker taught x classes per week.

The renumeration was agreed between the parties. This renumeration is higher than what other teachers receive.

The rate of pay for this Worker was based on their qualifications and experience and included GST and superannuation.

The Worker would invoice the Principal on a weekly basis.

Payment for the classes were paid directly into the Workers' bank account.

The amount on money the employee received per class was irrespective of the length of the class she taught.

The Worker was paid for the completion of the job not by the hour.

No payment summary was issued to the Worker.

The Worker was not paid any sick leave or holiday pay.

Initially when the business commenced, the Worker could delegate their classes to other Workers. For example, if they were sick or could not take a class they would find a replacement. This was done by the Worker, who would ask another teacher already working for the studio to replace them. The payment would be reflected in the invoices sent to the Principal at the end of the week.

In the months leading up to the sale of the business, if the Worker could not do a class for example, if they were sick, the Principle would teach the class to save money.

One class that the Worker conducted required them to bring some of their own equipment, by way of music and straps. For the other classes the Worker did not provide their own equipment as no equipment was needed.

The Worker was free to do whatever classes they wanted to suit their schedule.

The Worker has own ABN and operates a business of own as a yoga instructor. The Worker was free to work for themselves and elsewhere. This particular Worker uses social media platforms to advertise their business.

The Worker reported to the Principal. If they had any concerns this was via text message.

If there was an issue with the Worker, the Principal would address the issue with the Worker, but the Worker had to fix the problem.

The Worker was not required to attend staff meetings or company events.

No instructions on how to perform the role were given to the Worker but they did need to follow the code of conduct policy of the studio.

The Worker was not required to wear a uniform.

Student were required to book into a class via an app or on-line. They could check to see which classes specific teachers were taking.

The Worker was required to have their own insurance. If the Worker was injured whilst at work their own insurance was used to cover their expenses.

If a student injured themselves as a result of a teacher's action, then the Workers' insurance covered this.

The Principal states that the studio is set up with the correct workplace health and safety requirements to minimise accidents to the student.

After the employee ceased working for the studio, they emailed the Director and asked about outstanding superannuation contributions owed for the past x years.

Reasons for decision

Summary

The facts and evidence suggest that the Worker was your employee 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 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? (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.

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.

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.

The right to control versus actual control is particularly relevant where the nature of the employment requires a considerable degree of experience, knowledge or skill.

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

This distinction is also referred to as the integration or organisation test.

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

An unlimited power to delegate work is an important indication that the worker is an independent contractor. Delegation is generally implied in a contract for services where the emphasis is on result. However, delegation clauses are considered in the context of the contract as a whole to determine if they are consistent with the apparent essence of the contract or if they are merely self-serving statements.

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.

Delegation is not simply the act of substituting one employee for another, or shifting a task from one employee to another, or the ability to swap shifts or request a fellow employee to perform some duties - it is the ability to subcontract or employ others to perform the work, or to assist the contractor in their business to perform the work contracted for.

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.

Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee.

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.

The higher the proportion of the gross income of the worker which is required to be expended in deriving that income, and the more substantial the assets which the worker brings to the tasks, the more likely that the contract is for services, or that the contract is with an independent contractor.

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 this case

You engaged Workers by word of mouth or through the social media. You engaged this Worker as yoga instructor to run classes at your studio. There is no formal contact or agreement in place between you and the Worker. The Worker invoiced you for their services at a fixed rate per class and provided their ABN on their invoices.

These terms of engagement indicate the relationship between you and the Worker would be that of a principal and independent contractor. However, as there is no formal contract in place, it is difficult to determine the true nature of the work engagement between you and the Worker.

Based on the information you provided, the Worker could choose whether or not to take a class and could present the class without interference from you. However, they were still required to run their classes within the overall studio timetable. The Worker was not supervised performing their duties. The Worker was free to run the class as they wished but at all times were required to follow the code of conduct policy of the studio. You addressed any issues with Worker as they reported to you directly. These facts indicate that the Worker had more control of their work, but you still had some basic control over how the work should be performed.

The Worker was not required to wear a uniform or attend meetings in your business. You stated the Worker could work for other studios or themselves if they desired. While it is possible the Worker may not be seen as representing your business while conducting a class, the fact that the classes were being held within your business means the work being performed would more likely benefit your business rather than the Worker. Bookings for classes were all made via an app or on-line. The students may be attending the class for a particular teacher or they could be coming because they like the location and facilities your business provides. Overall, there are indicators the Worker can be seen as representing your business.

The Worker was paid a fixed sum upon completion of the class. The payment of a fixed sum upon completion of the class does not necessarily mean the Worker was paid for a result. In regard to this, paragraph 46 of SGR 2005/1 states:

46. While the notion of 'payment for a result' is expected in a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in FC of T v. Barrett & Ors found that land salesmen, who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only were employees and not independent contractors. Likewise, the High Court in Hollis v. Vabu considered that payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Further, the Full Court of the Supreme Court of South Australia in Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

Therefore, the information provided indicates that the Worker was not engaged to produce a result.

The Worker was responsible for arranging a replacement worker. All teachers were sent the schedule and the Worker would ask a teacher on that schedule to take her class if she could not do the class. The invoicing at the end of the week would identify who had done which classes. So, the replacement workers invoice you directly.

The method of arranging the replacement worker would appear to be substitution rather than delegation considering the method of payment. This is because the Worker chooses a substitute worker from the schedule. The substitute worker instead of invoicing the Worker who then would pay them, invoice you and you pay the substitute workers.

Such payment method was recognised in McFarlane v. Glasgow City Council [2001] IRLR 7. In that case, it was held that gymnastic instructors engaged by the council were employees of the council, notwithstanding the fact that the instructors were obliged to find replacements when they were unable to take a class. One of the factors leading to this conclusion was that the replacements were paid directly by the council rather than by the instructors.

Therefore, the replacement worker arrangement currently in place is in the nature of substitution rather than delegation which indicates the relationship is employee and employer relationship.

You stated that the Worker must provide their own insurances. You also expect any student injured in a class through the fault of a Worker will seek redress directly with them. Therefore, it could be seen as the Worker bearing some of the risks associated with the work performed.

However, the Worker receives a set fee per class for work they perform. Where any substandard work was performed the result would be a loss of satisfaction by your customers. The level of attendance of a particular class would ultimately affect your profit rather than your workers'. Clients that do not have a good experience are unlikely to come back. However, the Worker would be paid the same amount for the class whether it was successful or not. Ultimately, the risk of loss for the Worker arises from your right to not offer them classes on your roster. This risk is analogous to the risk borne by a casual employee.

Information you provided indicates that you assumed more commercial risk and responsibility in relation to the yoga classes run by the Worker. This is more in favour of the notion that the relationship between you and the Worker is employee and employer relationship.

Our conclusion regarding the common law definition of employee

As the facts and evidence indicate that the 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

Summary

Yes, the Worker is considered an employee under subsection 12(3) of the SGAA.

Detailed Reasoning

Extended definition of employee for SGAA purposes

The extended definition of employees under 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.

Subsection 12(3) of the SGAA requires the individual to be working wholly or principally for the labour of the person to meet the extended definition. The SGR 2005/1 provides further guidance on this issue and states at paragraph 11 that:

Where the terms of the contract 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 of delegation); and

-   the individual is not paid to achieve a result,

The contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

Each of the three conditions must be met to consider a contract to be wholly or principally for the labour of the individual.

Is the Worker remunerated wholly or principally for labour?

In assessing whether a person has been remunerated wholly or principally for labour and skills the ATO view is that, in the context of subsection 12(3) of the SGAA 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 is wholly or principally for labour where the labour content exceeds 50% of the value of the contract. The payment for a result is a factor in determining whether a contract is wholly or principally for labour.

Contracts which predominantly provide for payments in respect of the supply of goods, materials, or hire of plant or machinery and any other related costs incurred by the recipient of such payments in the course of performing work under the contract are not principally for labour.

Is the Worker required to perform the work personally?

The second requirement of subsection 12(3) of the SGAA is that it requires the labour of the individual personally. That is, the worker does not have the right to delegate or subcontract the work to another party. Even if the contractor has no intention to delegate or subcontract the work and actually performs the work personally, the contract itself is still not for the labour of the person if there is a possibility of delegating the work to another person.

Paragraph 49 of SGR 2005/1 states that where a worker is engaged under contract:

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

As discussed earlier, we consider that the facts and evidence indicate that the Worker was not able to delegate if they could not complete a class but had to nominate a substitute instructor who was paid by you.

Is the Worker paid to achieve a result?

The third and last requirement of subsection 12(3) of the SGAA is that the payments received by the Worker must not be in relation to the production of a given result, but instead should be for their labour.

In this case

Based on the available facts and evidence, we consider that the Worker was paid primarily for their own labour and skills.

The Worker was not able to delegate work but were able to nominate a substitute teacher who was paid by you.

We also consider that the facts and evidence indicate that the Worker was not paid for a result.

Conclusion

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 the Worker, the Commissioner concludes that the Worker met 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, you did have an obligation to provide superannuation support to the Worker in accordance with the SGAA for the period under review.

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