Edited version of private advice

Authorisation Number: 1052083458373

Date of advice: 21 September 2023

Ruling

Subject: Superannuation guarantee - status of the worker

Question 1

Was the Worker your common law employee under subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the relevant period?

Answer

No

Question 2

Was the Worker considered your common law employee under the expanded definition contained in subsection 12(3) and 12(8) of the SGAA for the relevant period?

Answer

No

This advice applies for the following period:

1 July 2020 to 30 June 2022

Relevant facts and circumstances

An organisation (the Principal) signed a fixed fee service agreement with an individual (the Worker).

You have provided a copy of a Client Agreement.

You have provided copies of invoices issued by the Worker and paid by the Principal in the 2022 financial year.

You have advised that the Worker is in control of the work performed and does not receive instruction from you as to what work is to be done, how the work is to be done or when. The Worker is engaged for the skill and knowledge required to achieve the outcome, you do not have and are therefore not in a position to supervise or control the Worker. The services provided by the Worker for the end-to-end process monthly are outlined in the Contract. The Worker is paid for the result of the service provided.

You have further advised:

•                     If the Worker was unable to complete the agreed services, they have the ability to delegate the work to complete the service. If the work was not completed due to the fault of the Worker, which resulted in missing a lodgement and you were penalised, the Worker would be required to rectify or reimburse you. If the reason the Worker was unable to complete the work or a missed lodgement due to your issues, it would be your responsibility.

•                     The Worker is not required to come to your office, to use the company's PC, to perform the service. The Worker uses cloud-based accounting software and can and does work remotely. However, there is an industry specific system where the Worker needs to access the company PC from time to time, which can be accessed when the Worker attends your office.

•                     Your business uses MYOB AccountRight software. The Worker also has their own My MYOB account which you have given an invite for to provide the service, as you do with external Auditors. The Worker is also required to use industry specific and/or add on software for some aspect of the service, which is common practice.

•                     The Worker is paid for a monthly fee for the services they provide to the Principal.

The main services outlined in the Contract are:

•                     Bookkeeping.

•                     Payroll.

•                     BAS services..

•                     End of Financial Year reports

The Contract has outlined the Principal's responsibilities as allowing access to relevant business records.

Other key conditions of the Contract are:

•                     The Worker will indemnify the Principal for any loss that may result from third part claims arising from the provision of their services.

•                     The Worker can delegate their work to others.

•                     Invoices are to be send upon completion of the agreed work.

•                     Either party can terminate the contract.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

Reasons for decision

Summary

The facts and evidence suggest that the worker is not your employee for the purposes of the SGAA under either the common law test or the extended definition as set out in subsection 12(1) of the SGAA. You therefore did not have an obligation to pay superannuation contributions on behalf of the Worker

Detailed reasoning

Question 1

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.

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.

The Principal operates a business. The Worker is providing services of bookkeeping, payroll, BAS, end of financial reports for auditors, consulting, and training staff. The engagement was via the Contract that includes: tasks to be completed, remuneration, indemnity delegation, access to the Principal's records, termination, and termination.

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.

In this case, the Contract sets out what work to be done, however the Contract does not set out how the work is to be done. If additional work is required, then the Worker requires the scope to be outlined. The Contract can be terminated by either party with 30 days' notice.

The Worker is not required to work at the Principal's premises unless access is needed for specific systems. This would support the contention that the Principal does not control how the work is done

The Worker can charge a cancellation fee if an appointment in cancelled by the Principal on the day. This is contained in the Contract.

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.

The Worker is providing services as an individual carrying on their own business (under a contract for services). The Principal is a business and the services being performed by the Worker is bookkeeping. It is not an integral to the business but rather the provides a service to support the business. The Worker's professional skills are such that they can make an independent career by selling that skill. In this case, the Worker can conduct their own business using those skills and generate goodwill in the bookkeeping industry.

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.

The worker is engaged for the skill and knowledge required to achieve the outcome, you do not have and are therefore not in a position to supervise or control the worker. The services provided by the worker for the end to end process monthly are outlined in the Contract. The worker is paid for the result of the service provided.

In this case, the Contract does not stipulate the means by which the Worker must perform the service. The Worker is free to employ their own means to achieve the contractually specified outcome. The essence of the contract is to achieve a result - bookkeeping BAS and reports ready for the ATO and auditor.

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. The Worker must invoice for services performed.

The Worker uses MYOB AccountRight software and the worker also has their own My MYOB account which the Principal has given the Worker an invite for and is used to access MYOB and provide the service, as the Principal does with external Auditors.

The Worker issues monthly invoices to the Principal for the services they have completed. This suggests that the Worker is paid to achieve a result.

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.

In this case, the Contract has a Utilisation of Other workers clause. It states employees or contractors may be used to help complete the agreed work as required. This power of delegation strongly supports the position that the Worker is a contractor, as an employee may only request other employees complete work for them, while a contractor is free to select who they wish to delegate their tasks to.

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.

The Contract states that the Principal will indemnify the Worker for a loss that may result from third party claims arising from the provision of services. If there is a claim against the Worker, the loss will be proportionately reduced by the extent to which the Principal contributed to the loss. This would not occur in the case of an employee where employers are vicariously liable for their employees and points towards the Worker not being a common law employee.

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, the Worker is not required to come to the Principal's office to use the company's PC to perform the service. The Worker uses cloud-based accounting software and can and does work remotely. However, there is an industry specific system that the worker needs to access from time to time that requires using the company PC.

In addition, the Principal is required to keep their own backups, the Worker has their own backup based on industry requirements. The documents and files belong to the employer, however the licence for the account software used for the business belongs to the Worker as they can charge a licence fee on completion/termination. Early termination also may result in any subscriptions that have been taken out by the Worker to be reimbursed.

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 is not a common law employee of the Principal.

Question 2

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 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.

Based on the information provided

•                     the Worker is performing services that is principally for their personal skills as a bookkeeper

•                     there is a right to delegate as per the Contract

•                     the Worker has to deliver results - review and report on monthly and quarterly BAS, lodgment of BAS and PAYG withholding, Super guarantee STP

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 is paid primarily for their own labour and skills.

The individual must perform the duties themselves

As discussed earlier, we consider that the facts and evidence indicate that the Worker does 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 is paid for a result.

Our conclusion regarding the extended definition of employee

Accordingly, as the Worker does not satisfy all three components of the extended definition under subsection 12(3) of the SGAA, they do not meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion

After considering all available facts and evidence relating to the working relationship between you and the Worker, the Commissioner concludes that the Worker does not meet the definition of an employee, for the purposes of the SGAA under both the common law test and the extended definition as set out in subsection12(3) of the SGAA,

Therefore, you did not have an obligation to provide superannuation support to the Worker in accordance with the SGAA for the period under review.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).