Edited version of administratively binding advice

Authorisation Number: 1011492529488

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Advice

Subject: Superannuation Guarantee: Status of the worker

Issue 1

Question 1

Are individuals engaged under an Agreement (the Agreement) employees of the principal for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

No. The individuals are not considered employees of the principal for the purposes of the SGAA. Please see our 'reasons for decision'.

Question 2

Are individuals engaged under the Agreement employees of the principal for the purposes of the SGAA where payment is made in respect to rectifying errors caused by the principal and payment falls outside the Agreement (Type 1 Assignment) or where payment is made in respect to rectifying errors caused by another worker engaged under the Agreement and payment falls outside the Agreement (Type 2 Assignment)?

Advice

No. The individuals are not considered employees of the principal for the purposes of the SGAA. Please see our 'reasons for decision'.

This advice applies for the following period/s:

Period ending 30 September 2010

Period ending 31 December 2010

Period ending 31 March 2011

Period ending 30 June 2011

Period ending 30 September 2011

Period ending 31 December 2011

Period ending 31 March 2012

Period ending 30 June 2012

Period ending 30 September 2012

Period ending 31 December 2012

Period ending 31 March 2013

Period ending 30 June 2013

Period ending 30 September 2013

Period ending 31 December 2013

Period ending 31 March 2014

Period ending 30 June 2014

Period ending 30 September 2014

Period ending 31 December 2014

Period ending 31 March 2015

Period ending 30 June 2015

The arrangement commences on:

1 July 2010

Issue 2

Question 1

Will the Commissioner provide advice with respect to individuals engaged by the principal under the Agreement where payment is made in respect to services where payment falls outside the Agreement (Type 3 Assignment)?

Advice

No. The Commissioner is unable to provide advice with respect to individuals the principal engages under the Agreement where payment is made in respect to Type 3 Assignments. Please see our 'reasons for decision'.

This advice applies for the following period/s:

Period ending 30 September 2010

Period ending 31 December 2010

Period ending 31 March 2011

Period ending 30 June 2011

Period ending 30 September 2011

Period ending 31 December 2011

Period ending 31 March 2012

Period ending 30 June 2012

Period ending 30 September 2012

Period ending 31 December 2012

Period ending 31 March 2013

Period ending 30 June 2013

Period ending 30 September 2013

Period ending 31 December 2013

Period ending 31 March 2014

Period ending 30 June 2014

Period ending 30 September 2014

Period ending 31 December 2014

Period ending 31 March 2015

Period ending 30 June 2015

The arrangement commences on:

1 July 2010

Relevant facts and circumstances

Your advice is based on the following facts.

The ATO received an application for a private ruling (PR) seeking advice as to whether certain workers would be considered employees of the principal for the purposes of the SGAA.

Attached to your application was an undated copy of the Agreement, an undated copy of an 'Offer of Employment' letter and a copy of an Employee/Contractor report you completed on the ATO website.

Later, the ATO wrote to you to advise that we were legislatively prohibited from providing a PR on SGAA matters but could provide you with Administratively Binding Advice (ABA).

Taxpayer contentions

In your application you made the following contentions in relation to the scheme. These contentions are set out below

Background

You currently employ a number of staff, of which approximately half are currently involved in manufacturing.

The division commenced a number of years ago.

Historically, you engaged the workers as employees to manufacture items and you understand that superannuation contributions should be paid in respect to wages paid to these employees.

As a result of the Global Financial Crisis, you have undertaken a detailed analysis of your entire division to identify ways to become more competitive.

As a result of this analysis you have introduced new methods and procedures.

One area that remains of concern is a process currently undertaken by employees.

You intend to change the way you engage persons to undertake the manufacturing process of items and would like to understand your legal obligations.

Current Arrangement

All current employees are engaged under a letter of employment as set out in your letter.

Other practical matters regarding these persons that is not specified in the letter of employment, include:

· In the event of faulty workmanship by the staff member, the cost of rectification is effectively borne by you.

· In the event there is not enough work of the type to which the employee is engaged, alternative work is found for the employee. This may be unrelated to that the person was engaged to do. Where no other work is found, the staff member is required to take annual leave or in some cases, leave without pay.

· Training for staff members is typically at your cost.

· Persons employed under the letter of engagement cannot delegate the work they have been issued to someone else.

Proposed Arrangement

You intend to change the way you engage persons to undertake fabrication.

All other persons will continue to be engaged under their letter of employment and you do not seek clarification in respect of these persons.

You seek to change the nature of the relationship between you and the workers to become the same as other external suppliers to you. This new relationship is not possible under the current employer and employee relationship.

By changing the nature of the relationship you believe you will become more competitive and set out some of your reasons:

· Supervision - you identified that typically there is a difference of up to 30% in output when staff are closely supervised compared to when they are left to work at their own pace. You intend to change the position such that the persons effected are paid on a results basis rather than an hourly basis, allowing you to direct resources for supervision elsewhere and reduce costs. This will also have a direct financial impact on the workers engaged on a results basis directly relating to their productivity.

· Faulty workmanship - you identified that the cost of faulty workmanship and the cost of putting systems in place to reduce the likelihood of errors is a significant expense to you. If the person who caused the fault workmanship is directly responsible for the cost of rectification, this will reduce your costs and make you more competitive.

You believe you have set out valid reasons for the change of engagement and take care to point out that this change has nothing to do with avoiding your superannuation obligations.

Operation of proposed arrangement

You have provided a copy of a draft Agreement to be entered into between you and each person who will undertake steel wall frame fabrication.

Under the agreement:

The worker is engaged to fabricate items.

The amount payable for each item will be assessed in advance and effectively agreed between you and the worker before the worker commences fabrication.

Due to the varying size and configuration of the items, it is not possible to set a general piece rate, however in some cases where repeat orders of the same items are ordered by your clients you will effectively set a standard 'in advance' price agreed with the worker for the fabrication of items.

If a worker chooses not to accept a job you will have no authority to require the worker to complete the job.

Workers will not be paid for partially completed items or items which require rectification work due to faulty workmanship.

Liability to make payment to a worker will arise upon delivery of a completed item that does not require any rectification work.

The worker will have sole responsibility for controlling the manner in which the fabrication is undertaken. They are free to engage someone else to complete the job.

Where the worker chooses to delegate the job to another person, the worker will remain responsible to you and you are only liable to make payment to the original worker.

The worker is free to complete the job at premises other than your own, however practically this is unlikely to occur often.

You are not concerned where the item is fabricated, providing they are presented at your premises on time and at an acceptable level of workmanship.

In the event of faulty workmanship caused by the worker, the worker is responsible to rectify the error at their own cost.

In the event that rectification does not occur you will make alternative arrangements and seek reimbursement from the contractor.

The workers may choose their own working hours when completing work on your premises, however for Occupational Health and Safety reasons at least one of your full time employees must be on site at the time.

You have a number of your own tools and equipment that could be utilised in the fabrication of items which are in existence because they were purchased during the time that you employed staff members. You will allow the workers to use these tools and equipment free of charge. Where a worker chooses to fabricate items from premises other than yours, they are responsible for providing their own tools and equipment.

The workers are free to refuse any offer by you to fabricate an item if they choose. Where a worker initially accepts an offer but later withdraws, you are not liable to pay the worker for any partially completed work.

You have discretion to withdraw a job that has not been completed within an acceptable time frame. If this were to occur you would have no liability to pay the worker for the partially completed item.

In some cases it is more efficient to have a team of two or more persons involved in the fabrication of an item. If this were the case, the total amount payable would be allocated between the workers proportionately unless you were advised to allocate payment on another basis. In the absence of advice from the workers, you would pay each worker proportionately, for example if two workers were involved, you would pay 50% to each worker.

Once a job is completed you are under no obligation to provide further work to the worker.

Payment to the workers in respect to fabrication incorporates an allowance for superannuation. Paragraph 12.5 was inserted to protect you from liability for failure to pay superannuation.

Should the ATO issue a ruling setting out that you are liable to pay superannuation contributions on behalf of these workers, adjustments will be made to the workers remuneration so that you will not be financially out of pocket.

Type 1 Additional Assignment - Remedial work caused by your errors

The workers will be provided with drawings by you from which to fabricate the item.

In some cases an error caused by the drawing office causing the item to be fabricated in error through no fault of the workers. You consider it would be unjust to require the workers to rectify an error caused by you.

In these cases, the workers are considered best placed to rectify the error and you propose to pay them on an hourly rate for the time they spend rectifying the error.

Type 2 Additional Assignment - Remedial work caused by another Contractor

The workers are liable for rectification work where the fabricated items are not in accordance with an acceptable level of workmanship.

You are under a contractual obligation to your clients to deliver items on a timely basis.

In some cases where rectification work is required it is not practicable or possible for the worker who caused the error to rectify the work.

Accordingly you may have no option but to offer another worker the remedial work. This worker would rightfully demand payment for completing the work.

You consider it likely that this worker would only agree to complete rectification work if they were paid on an hourly rate. In such cases you would seek to recover this amount from the worker who caused the error.

Type 3 Additional Assignment - Strapping or Loading of Completed Items

Your current employees may be required to strap and/or load completed items onto a truck for transport.

Under the terms of the Agreement, the workers are not required to undertake either of these activities.

You consider it may be appropriate to offer the workers an opportunity to undertake these activities under a separate arrangement.

You are not certain at this stage how you would remunerate a worker for undertaking these activities.

You propose to pay either an upfront fixed price or an hourly rate component.

It is difficult to ascertain the method of payment at this time as in some cases delays associated with these activities are caused by factors outside the control of the person undertaking them.

Your preference is to negotiate an upfront fixed price.

Type 4 Additional Assignment - Other services unrelated Item Fabrication

You anticipate that there will be circumstances where there is a period of time between jobs.

You are not obligated to provide the workers engaged under the Agreement 'other work' if no jobs are available.

You anticipate that there will be circumstances when certain workers will be offered some type of 'other work' whilst waiting for new fabrication jobs. Generally this would be where the time between jobs is relatively small (that is, from hours through to weeks).

Should this 'other work' be offered, it would be in the form of casual work on the same basis as your other employees and the worker would be paid on an hourly rate basis.

You believe that in this case you would be required to pay superannuation contributions on the workers behalf and you do not seek the Commissioner's view on this arrangement.

Assumption

The Commissioner provides this advice on the assumption that the individuals engaged to complete work identified by you as Type 1 and Type 2 Assignments will complete this work under a verbal agreement under terms and conditions comparable to those outlined in the Agreement. The principal stated that the only material difference would be that the workers would be paid on an agreed hourly rate, rather than a fixed flat rate.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 12 and

Superannuation Guarantee (Administration) Act 1992 12(3).

Reasons for decision

Issue 1 Question 1

Summary

Individuals engaged under the Agreement are not employees of the principal for the purposes of the SGAA as the Agreement sets out that they are engaged as independent contractors, are paid for a result and have the right to delegate their work to others. A detailed explanation is provided below.

Detailed reasoning

Employees under the SGAA

The SGAA places a requirement on all employers to provide a minimum level of superannuation support for their eligible employees by the due date or pay the superannuation guarantee charge (SGC).

While the term 'employee' which is defined in section 12 of the SGAA includes common law employees, section 12 of the SGAA also extends the definition of employee to include workers who are engaged under a contract wholly or principally for their labour. The employment relationship is often referred to as a 'contract of service'. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1 from a 'contract for service' which is typically a contractor and principal type of relationship and will not attract any 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.

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 a difficult task and will depend on the facts of each case.

Accordingly it is necessary to determine the true nature of the whole relationship between you and the workers as to whether there is a common law employer and employee relationship, or whether the workers meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Common law employee

The courts have developed a method for applying the ordinary, or 'common law' meaning of an 'employee'. Their approach is to look at a wide range of factors, which indicate whether a person is an employee. For example, if the employer provides the place of work, this might indicate an employment relationship, while the absence of holiday pay might suggest the opposite. The courts' decisions tend to be taken on balance, after considering the relevant factors.

The common law meaning of the term 'employee' was stated by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16. It is clear from that case that there is no single objective test which will give the answer:

it is the totality of the relationship between the parties which must be considered...the question is one of degree for which there is no exclusive measure.

While various factors have been identified by the courts as indicators of the true nature of the relationship, those features are only ever a guide to answering that question. It is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is working in the service of another (as an employee) or is working on his or her own behalf (as an independent contractor).

A clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole. That is, the parties cannot deem the relationship between themselves to be something that it is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. Subsequent conduct of the parties may demonstrate the relationship has a character contrary to the terms of the contract.

In deciding whether the workers are common law employees, there are a number of factors to consider. Some of these factors are considered below.

Terms of engagement

The fundamental task is to determine the nature of the contract between the parties. The terms and conditions of the contract whether express or implied, in the light of the circumstances surrounding the making of the contract will always be of considerable importance to the proper characterisation of the relationship between the parties.

Some conditions of engagement are closely associated with employment and may be persuasive factors. For example:

· provision of benefits such as annual or sick leave

· provision of benefits prescribed under an award

· payer prescribed times and locations for the performance of the work

· remuneration in the form of salary and wages

· the worker uses assets and materials provided by the payer or is reimbursed for expenses incurred in respect of use of their own assets and materials

· payer discretion in respect of task allocation and termination of engagement.

However, this list is not exhaustive and it must be emphasised that there is not a standard set of conditions applicable to an employee and another (different) set applicable to an independent contractor.

It might be argued that the parties' intention in forming a contract is not a subjective but an objective one; that is the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Isaacs J in Curtis v. the Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR at 25:

Where parties enter into a bargain with one another whereby certain rights and obligations are created, they cannot by a mere consensual label alter the inherent character of the relations they have actually called into existence. Many cases have arisen where Courts have disregarded such labels, because in law they were wrong, and have looked beneath them to the real substance.

In Hollis v. Vabu (2001) 207 CLR 21 (Hollis v Vabu) the High court determined that an indicator of an employer/employee relationship was that the workers were presented to the public and to those using the courier service as representatives of Vabu, as they wore uniforms bearing Vabu's logo.

Additionally in Hollis v Vabu it was noted that although no payments of annual leave or sick leave were given, and no superannuation deductions were made in respect of the bicycle couriers, the relationship between the parties is to be found not merely from these contractual terms. The system which was operated there under and the work practices imposed by Vabu go to establishing the 'totality of the relationship' between the parties and it is this which is to be considered.

Application to your case

The workers will be engaged under an Agreement which establishes that the worker is engaged as an independent contractor.

Regardless of the label either you or the workers place on the working relationship, merely stating that a worker's status is one of independent contractor cannot alter the true substance of the relationship if the underlying reality is one of employment. As discussed in the case of Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179 at 184:

...the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everyone else recognise it as a duck.

Accordingly the Commissioner must look beyond the label you place on the relationship and consider other practical matters related to the establishment of your relationship with the workers.

The Agreement is silent as to whether the workers are required to register for an Australian business number (ABN) or goods and services tax (GST), however does leave room for the insertion of the worker's ABN in the agreement header, and refers to the fact may be registered for GST.

The Agreement states that the principal is under no obligation to provide ongoing work, and the workers have the right to accept or reject a job.

The Agreement does not make provision for benefits traditionally associated with employment such as annual leave, sick leave or long service leave or leave loading.

Accordingly, with respect to the terms of engagement test, the Commissioner considers that the facts and evidence support the notion that your intent is to engage the workers are independent contractors.

Control Test

A prominent factor in determining the nature of the relationship between parties is the degree of control which the employer has over the employee, as it goes to the root of the classical view of the master-servant relationship. The degree of control varies with the type of job, as the increasing usage of skilled labour has seen a consequential reduction in supervisory functions. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but rather whether they have the right to exercise it.

Traditionally, a common law employee is told what work needs to be done, how it is to be done, and where it is to be done. However the mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship and a high degree of direction and control is not uncommon in a contract for service.

It is not necessary for the employer to exercise day to day control over the worker. What is important is that the employer has the legal right of control. As stated by Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 stated:

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in performance of his work resided in the employer so that he was subject to the latter's orders and directions.

Application to your case

With respect to day to day control, different elements of the Agreement indicate that both you and the worker have control under certain circumstances.

Elements which indicate your control include that:

· you will provide instructions as to the methodology to be used

· you will indicate a fixed price which you are prepared to offer for the completion of the job

· should the worker choose to decline the job, you are not obliged to offer an alternative job

· you have the discretion to withdraw a job that has been accepted by a worker but has not been completed within an acceptable time limit

· should the worker choose to complete the job at your premises, they must comply with your Occupational Healthy, Safety and Security policies and procedures

· you have complete discretion to determine whether a job has been completed to an acceptable level of workmanship

· you have the right to request the worker to undertake rectification work at their own cost

· if a worker refuses to undertake rectification work or cannot undertake rectification work within an acceptable time limit, you may arrange the rectification work to be undertaken by another party and recover the cost of rectification from the original worker, and

· the worker, or any persons engaged by the worker, may only remain on your premises whilst there is at least one of your full time staff members on site.

Elements which indicate the worker's control include that:

· the worker is solely responsible for controlling the manner in which they undertake the services

· the worker is free to choose whether or not to accept the job

· if the worker chooses to accept the job, the worker has the right to later withdraw from completing the job

· the worker is free to decide where to undertake the job, and

· the worker has the right to engage other persons to fabricate or assist in the completion of the job. Should this occur, the worker acknowledges and accepts that you bear no liability to the person so engaged.

Given that the Agreement gives both parties considerable control of elements of the relationship, and due to the fact that the Commissioner is unable to consider what actually occurs in practice, with respect to the control test, the Commissioner is unable to determine whether the facts and evidence support a principal and independent contractor relationship or an employer and employee relationship.

Integration Test

The integration test is primarily concerned with establishing whether the individual providing the service does so as an individual carrying on a business of their own or as an integral part of another's business organisation.

Whether the worker operates on their own account or as part of a business of the payer is sometimes viewed as a consideration of whether the worker would be viewed by a third party as carrying on their own enterprise as an independent contractor or operator and whether they could be expected to generate goodwill in their own right.

In the case of Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans [1952] 1 TLR 101 Denning LJ said:

...under a contract of service, a man is employed as part of the business, and his work is done as a integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

The 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 skill 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.

Application to your case

The terms of the Agreement are silent on many of the factors generally taken into account when considering whether a worker is integrated into a business, such as whether the workers can provide their services to others or whether the workers are required to wear uniforms or maintain dress standards.

Generally, where a contract does not expressly forbid an action or deny an action or condition, the right is implied to exist.

In your case, based on the Agreement, the Commissioner assumes that the workers are free to operate their own independent businesses, and are free to advertise their services to the general public and offer their services to other enterprises without restriction. Further it is assumed that you do not require the workers to adhere to any specific dress standards. These are conditions generally associated with a principal and independent contractor relationship.

Conversely, the fact that the workers are given permission to use your tools and equipment and no cost and the fact that in general, the workers are likely to complete their jobs from your premises are conditions generally associated with an employer and employee relationship.

Accordingly, with respect to the integration test, the Commissioner considers there are insufficient facts and evidence to make any conclusions as to the nature of the relationship.

Results test

Under a results based contract, payment is often made for a negotiated contract price, as opposed to an hourly rate. 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 (i.e. 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.

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. The production of a given result is considered to be a mark of independent contractor status.

In Worldbook (Australia) Pty Ltd v. Federal Commissioner of Taxation (1992) ATC 4327, Sheller JA said:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor…

'Results' contracts describe traditional principal and independent contract arrangements where a specific identifiable task is performed, for example the sale of encyclopaedias. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to the hours worked.

In a contract for services (whether written, oral or implied), the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the result for which the parties have bargained. Conversely under a contract of service, payment is not necessarily dependant on, or referable to, the completion of the specified services.

While the notion of 'payment for result' is expected to be a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis v. Vabu considered that the 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.

Accordingly, the true contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties and what the worker was hired to do.

Application to your case

The Agreement sets out that the workers are engaged for a specific result.

The Agreement further sets out that the workers will be paid upon completion of the job that is free from errors attributable to the worker.

The Agreement also sets out that you may summarise a worker's entitlement to payment in a recipient generated invoice.

Accordingly, with respect to the results test, the Commissioner considers in the absence of any evidence to the contrary, the facts and evidence are indicative of a principal and independent contractor relationship.

Delegation test

The power to delegate or subcontract work is an important factor in deciding whether the worker is an employee or independent contractor. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor.

Delegation is generally implied in a contract for services where the emphasis is on result rather than the person. 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.

Delegation is not simply the delegation of 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 freely subcontract or employ others to perform the work.

Application to your case

The Agreement clearly sets out that the workers have the right to delegate part or their entire job to another person at their discretion.

The Agreement further sets out that should the worker choose to engage another person, they will bear full responsibility for this person's work and remuneration.

Accordingly, with respect to the delegation test, the Commissioner considers in the absence of any evidence to the contrary, the facts and evidence are indicative of a principal and independent contractor relationship.

Risk test

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees. However a principal will not be liable for negligence or injury caused by an independent contractor.

The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit), the more they are likely to be regarded as being independent. Typically, a worker who derives piece rate payments and sustains large outgoings would be so exposed. 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 a contract with 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.

Application to your case

The Agreement clearly sets out that the worker bears responsibility for rectifying any defects in their work.

The Agreement also sets out that where a worker does not or cannot for any reason rectify their errors, that you are entitled to recover costs you incur in rectifying the errors.

The Agreement sets out that you will offer a flat rate payment for a particular job, and does not make reference to the worker's right to negotiate this rate should they consider the amount of remuneration is insufficient. However, they do have the right to accept or decline the offer, giving them the ability to only enter into jobs they consider of value.

The Agreement sets out that the workers are required to maintain appropriate insurances to cover the work carried out under law, however does not specify any specific type of insurance, such as public liability or indemnity insurance.

On balance, with respect to the risk test, the Commissioner is satisfied that the facts and evidence are indicative of a principal and independent contractor relationship.

Conclusion - Common Law

With respect to the relationship between you and the workers, the Commissioner is satisfied that the facts and evidence support the notion that the workers will not be common law employees and you will not have an obligation to provide superannuation in accordance with the SGAA.

As it is cannot be determined that the workers will be employees under common law, the Commissioner is also required to consider the extended definition in subsection 12(3) of the SGAA.

Extended definition of employee under subsection 12(3) of the SGAA

Where the common law test is not conclusive, the Commissioner must consider whether the worker meets the definition of employee under the extended definition under subsection 12(3) of the SGAA, which 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 provides that 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) was intended to extend the scope of the SGAA beyond traditional employment relationships to take into account some independent contractors who principally provide their own labour to meet obligations under a contract.

SGR 2005/1 provides further guidance on this issue and at paragraph 11 states 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 these conditions must be met before subsection 12(3) of the SGAA can be satisfied.

Will the workers be remunerated (either wholly or principally) for their labour? 

In assessing whether a person has been remunerated wholly or principally for their labour and skills, the Commissioner's 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. Labour includes mental and artistic effort as well as physical toll.

In this case, the workers will prove their professional skills to complete the job. There is no evidence that they will be remunerated for anything other than their labour.

Based on the information available, the Commissioner concludes that the workers will be remunerated (either wholly or principally) for their personal labour and skills.

Will the workers be required to perform the work personally?

The second requirement of subsection 12(3) of the SGAA is that it requires the individual to carry out the work 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 work to another person.

As previously discussed, the Commissioner considers that the workers are not expected to perform the work personally.

Will the workers be 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.

As previously discussed, the Commissioner considers that the workers will be paid to achieve a result.

Conclusion - extended definition of employee

As stated above, each of the three conditions in paragraph 11 of SGR 2005/1 must be met before subsection 12(3) of the SGAA can be satisfied. In this case, as the workers will not be expected to complete the work personally and will be paid for a result, the workers will not meet all three conditions. Accordingly they will not conclusively meet the extended definition of employee as set out in subsection 12(3) of the SGAA.

Conclusion - overall

Upon considering all the available facts and evidence the Commissioner is satisfied that the workers will not be considered your employees for the purposes of the SGAA under either the common law definition or the extended definition provided under subsection 12(3) of the SGAA.

Issue 1 Question 2

Summary

Individuals engaged under the Agreement where payment is made with respect to Type 1 and Type 2 Assignments are not employees of the principal for the purposes of the SGAA as the verbal agreement sets out that they are engaged as independent contractors and have the right to delegate their work to others. A detailed explanation is provided below.

Employees under the SGAA

The SGAA places a requirement on all employers to provide a minimum level of superannuation support for their eligible employees by the due date or pay the superannuation guarantee charge (SGC).

While the term 'employee' which is defined in section 12 of the SGAA includes common law employees, section 12 of the SGAA also extends the definition of employee to include workers who are engaged under a contract wholly or principally for their labour. The employment relationship is often referred to as a 'contract of service'. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1 from a 'contract for service' which is typically a contractor and principal type of relationship and will not attract any 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.

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 a difficult task and will depend on the facts of each case.

Accordingly it is necessary to determine the true nature of the whole relationship between you and the workers as to whether there is a common law employer and employee relationship, or whether the workers meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Common law employee

The courts have developed a method for applying the ordinary, or 'common law' meaning of an 'employee'. Their approach is to look at a wide range of factors, which indicate whether a person is an employee. For example, if the employer provides the place of work, this might indicate an employment relationship, while the absence of holiday pay might suggest the opposite. The courts' decisions tend to be taken on balance, after considering the relevant factors.

The common law meaning of the term 'employee' was stated by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16. It is clear from that case that there is no single objective test which will give the answer:

it is the totality of the relationship between the parties which must be considered...the question is one of degree for which there is no exclusive measure.

While various factors have been identified by the courts as indicators of the true nature of the relationship, those features are only ever a guide to answering that question. It is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is working in the service of another (as an employee) or is working on his or her own behalf (as an independent contractor).

A clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole. That is, the parties cannot deem the relationship between themselves to be something that it is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. Subsequent conduct of the parties may demonstrate the relationship has a character contrary to the terms of the contract.

In deciding whether the workers are common law employees, there are a number of factors to consider. Some of these factors are considered below.

Terms of engagement

The fundamental task is to determine the nature of the contract between the parties. The terms and conditions of the contract whether express or implied, in the light of the circumstances surrounding the making of the contract will always be of considerable importance to the proper characterisation of the relationship between the parties.

Some conditions of engagement are closely associated with employment and may be persuasive factors. For example:

· provision of benefits such as annual or sick leave

· provision of benefits prescribed under an award

· payer prescribed times and locations for the performance of the work

· remuneration in the form of salary and wages

· the worker uses assets and materials provided by the payer or is reimbursed for expenses incurred in respect of use of their own assets and materials

· payer discretion in respect of task allocation and termination of engagement.

However, this list is not exhaustive and it must be emphasised that there is not a standard set of conditions applicable to an employee and another (different) set applicable to an independent contractor.

It might be argued that the parties' intention in forming a contract is not a subjective but an objective one; that is the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Isaacs J in Curtis v. the Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR at 25:

Where parties enter into a bargain with one another whereby certain rights and obligations are created, they cannot by a mere consensual label alter the inherent character of the relations they have actually called into existence. Many cases have arisen where Courts have disregarded such labels, because in law they were wrong, and have looked beneath them to the real substance.

In Hollis v. Vabu (2001) 207 CLR 21 (Hollis v Vabu) the High court determined that an indicator of an employer/employee relationship was that the workers were presented to the public and to those using the courier service as representatives of Vabu, as they wore uniforms bearing Vabu's logo.

Additionally in Hollis v Vabu it was noted that although no payments of annual leave or sick leave were given, and no superannuation deductions were made in respect of the bicycle couriers, the relationship between the parties is to be found not merely from these contractual terms. The system which was operated there under and the work practices imposed by Vabu go to establishing the 'totality of the relationship' between the parties and it is this which is to be considered.

Application to your case

The workers will be engaged under an Agreement which establishes that the worker is engaged as an independent contractor. However the Agreement stipulates that payment made with respect to Type 1 and Type 2 Assignments will not be considered covered by the Agreement.

During a telephone conversation between the ATO, the principal stated that workers would be engaged to complete Type 1 and Type 2 Assignments under verbal agreements which would include an implied understanding that the terms and conditions of the agreement would be the same as the Agreement, with the only exception being that the workers would be paid on an hourly rate basis, rather than fixed flat rate basis.

As previously discussed, with respect to the terms of engagement test, the Commissioner considers that the facts and evidence support the notion that your intent is to engage the workers are independent contractors. The difference in the method of remuneration between work completed under the written Agreement and the proposed verbal agreement does not alter the Commissioner's view.

Control Test

A prominent factor in determining the nature of the relationship between parties is the degree of control which the employer has over the employee, as it goes to the root of the classical view of the master-servant relationship. The degree of control varies with the type of job, as the increasing usage of skilled labour has seen a consequential reduction in supervisory functions. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but rather whether they have the right to exercise it.

Traditionally, a common law employee is told what work needs to be done, how it is to be done, and where it is to be done. However the mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship and a high degree of direction and control is not uncommon in a contract for service.

It is not necessary for the employer to exercise day to day control over the worker. What is important is that the employer has the legal right of control. As stated by Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 stated:

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in performance of his work resided in the employer so that he was subject to the latter's orders and directions.

Application to your case

With respect to day to day control, and with reference to the terms of the written Agreement, different elements of the Agreement indicate that both you and the worker have control under certain circumstances.

Elements which indicate your control include that:

· you will provide instructions as to the methodology to be used

· you will indicate an hourly rate of remuneration which you are prepared to offer for the completion of the job

· should the worker choose to decline the job, you are not obliged to offer an alternative job

· you have the discretion to withdraw a job that has been accepted by a worker but has not been completed within an acceptable time limit

· should the worker choose to complete the job at your premises, they must comply with your Occupational Healthy, Safety and Security policies and procedures

· you have complete discretion to determine whether a job has been completed to an acceptable level of workmanship

· you have the right to request the worker to undertake rectification work at their own cost

· if a worker refuses to undertake rectification work or cannot undertake rectification work within an acceptable time limit, you may arrange the rectification work to be undertaken by another party and recover the cost of rectification from the original worker, and

· the worker, or any persons engaged by the worker, may only remain on your premises whilst there is at least one of your full time staff members on site.

Elements which indicate the worker's control include that:

· the worker is solely responsible for controlling the manner in which they undertake the services

· the worker is free to choose whether or not to accept the job

· if the worker chooses to accept the job, the worker has the right to later withdraw from completing the job

· the worker is free to decide where to undertake the job, and

· the worker has the right to engage other persons to fabricate or assist in the completion of the job. Should this occur, the worker acknowledges and accepts that you bear no liability to the person so engaged.

Given that the Agreement gives both parties considerable control of elements of the relationship, and due to the fact that the Commissioner is unable to consider what actually occurs in practice, with respect to the control test, the Commissioner is unable to determine whether the facts and evidence support a principal and independent contractor relationship or an employer and employee relationship.

Integration Test

The integration test is primarily concerned with establishing whether the individual providing the service does so as an individual carrying on a business of their own or as an integral part of another's business organisation.

Whether the worker operates on their own account or as part of a business of the payer is sometimes viewed as a consideration of whether the worker would be viewed by a third party as carrying on their own enterprise as an independent contractor or operator and whether they could be expected to generate goodwill in their own right.

In the case of Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans [1952] 1 TLR 101 Denning LJ said:

...under a contract of service, a man is employed as part of the business, and his work is done as a integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

The 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 skill 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.

Application to your case

With reference to the terms of the written Agreement, the Agreement is silent on many of the factors generally taken into account when considering whether a worker is integrated into a business, such as whether the workers can provide their services to others or whether the workers are required to wear uniforms or maintain dress standards.

Generally, where a contract does not expressly forbid an action or deny an action or condition, the right is implied to exist.

In your case, based on the Agreement, the Commissioner assumes that the workers are free to operate their own independent businesses, and are free to advertise their services to the general public and offer their services to other enterprises without restriction. Further it is assumed that you do not require the workers to adhere to any specific dress standards. These are conditions generally associated with a principal and independent contractor relationship.

Conversely, the fact that the workers are given permission to use your tools and equipment and no cost and the fact that in general, the workers are likely to complete their jobs from your premises are conditions generally associated with an employer and employee relationship.

Accordingly, with respect to the integration test, the Commissioner considers there are insufficient facts and evidence to make any conclusions as to the nature of the relationship.

Results test

Under a results based contract, payment is often made for a negotiated contract price, as opposed to an hourly rate. 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.

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. The production of a given result is considered to be a mark of independent contractor status.

In Worldbook (Australia) Pty Ltd v. Federal Commissioner of Taxation (1992) ATC 4327, Sheller JA said:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor…

'Results' contracts describe traditional principal and independent contract arrangements where a specific identifiable task is performed, for example the sale of encyclopaedias. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to the hours worked.

In a contract for services (whether written, oral or implied), the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the result for which the parties have bargained. Conversely under a contract of service, payment is not necessarily dependant on, or referable to, the completion of the specified services.

While the notion of 'payment for result' is expected to be a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis v. Vabu considered that the 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.

Accordingly, the true contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties and what the worker was hired to do.

Application to your case

With reference to the terms of the written Agreement, the Agreement sets out that the workers are engaged for a specific result.

The Agreement further sets out that the workers will be paid upon completion of the job that is free from errors attributable to the worker.

The Agreement also sets out that you may summarise a worker's entitlement to payment in a recipient generated invoice.

The Commissioner acknowledges that with respect to work completed where payment relates to Type 1 or Type 2 Assignments, remuneration will be based on an hourly rate of payment, rather than a flat fixed rate you propose to pay under the written Agreement.

In this instance, the workers will continue to be engaged for a specified result; the rectification of an error made by either a fellow worker or the principal. Assuming that the principal will retain the right to withhold payment where a job is incomplete or not to standard, as set out under the written agreement, the Commissioner considers that the workers would continue to be paid for a result as concluded under Question 1.

Accordingly, with respect to the results test, the Commissioner considers in the absence of any evidence to the contrary, the facts and evidence are indicative of a principal and independent contractor relationship.

Delegation test

The power to delegate or subcontract work is an important factor in deciding whether the worker is an employee or independent contractor. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor.

Delegation is generally implied in a contract for services where the emphasis is on result rather than the person. 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.

Delegation is not simply the delegation of 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 freely subcontract or employ others to perform the work.

Application to your case

With reference to the terms of the written Agreement, the Agreement clearly sets out that the workers have the right to delegate part or their entire job to another person at their discretion.

The Agreement further sets out that should the worker choose to engage another person, they will bear full responsibility for this person's work and remuneration.

Accordingly, with respect to the delegation test, the Commissioner considers in the absence of any evidence to the contrary, the facts and evidence are indicative of a principal and independent contractor relationship.

Risk test

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees. However a principal will not be liable for negligence or injury caused by an independent contractor.

The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit), the more they are likely to be regarded as being independent. Typically, a worker who derives piece rate payments and sustains large outgoings would be so exposed. 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 a contract with 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.

Application to your case

With reference to the terms of the written Agreement, the Agreement clearly sets out that the worker bears responsibility for rectifying any defects in their work.

The Agreement also sets out that where a worker does not or cannot for any reason rectify their errors, that you are entitled to recover costs you incur in rectifying the errors.

You have indicated that you will offer an hourly rate basis for payment for a particular job, but have not indicated whether the worker will have a right to negotiate this rate should they consider the amount of remuneration is insufficient. However, with reference to the written agreement, they do have the right to accept or decline the offer, giving them the ability to only enter into jobs they consider of value.

The Agreement sets out that the workers are required to maintain appropriate insurances to cover the work carried out under law, however does not specify any specific type of insurance, such as public liability or indemnity insurance.

On balance, with respect to the risk test, the Commissioner is satisfied that the facts and evidence are indicative of a principal and independent contractor relationship.

Conclusion - Common Law

With respect to the relationship between you and the workers, the Commissioner is satisfied that the facts and evidence support the notion that the workers will not be common law employees and you will not have an obligation to provide superannuation in accordance with the SGAA.

As it is cannot be determined that the workers will be employees under common law, the Commissioner is also required to consider the extended definition in subsection 12(3) of the SGAA.

Extended definition of employee under subsection 12(3) of the SGAA

Where the common law test is not conclusive, the Commissioner must consider whether the worker meets the definition of employee under the extended definition under subsection 12(3) of the SGAA, which 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 provides that 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) was intended to extend the scope of the SGAA beyond traditional employment relationships to take into account some independent contractors who principally provide their own labour to meet obligations under a contract.

SGR 2005/1 provides further guidance on this issue and at paragraph 11 states 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 these conditions must be met before subsection 12(3) of the SGAA can be satisfied.

Will the workers be remunerated (either wholly or principally) for their labour? 

In assessing whether a person has been remunerated wholly or principally for their labour and skills, the Commissioner's 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. Labour includes mental and artistic effort as well as physical toll.

In this case, the workers will prove their professional skills to rectify errors. There is no evidence that they will be remunerated for anything other than their labour.

Based on the information available, the Commissioner concludes that the workers will be remunerated (either wholly or principally) for their personal labour and skills.

Will the workers be required to perform the work personally?

The second requirement of subsection 12(3) of the SGAA is that it requires the individual to carry out the work 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 work to another person.

As previously discussed, the Commissioner considers that the workers are not expected to perform the work personally.

Will the workers be 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.

As previously discussed, the Commissioner considers that the workers will be paid to achieve a result.

Conclusion - extended definition of employee

As stated above, each of the three conditions in paragraph 11 of SGR 2005/1 must be met before subsection 12(3) of the SGAA can be satisfied. In this case, as the workers will not be expected to complete the work personally and will be paid for a result, the workers will not meet all three conditions. Accordingly they will not conclusively meet the extended definition of employee as set out in subsection 12(3) of the SGAA.

Conclusion - overall

Upon considering all the available facts and evidence the Commissioner is satisfied that the workers will not be considered your employees for the purposes of the SGAA under either the common law definition or the extended definition provided under subsection 12(3) of the SGAA.

Issue 2 Question 1

Summary

The Commissioner is unable to provide advice as you have been unable to provide sufficient information about the terms and conditions under which workers will be engaged to complete Type 3 Assignments.

Detailed reasoning

The Commissioner is unable to provide advice with respect to individuals engaged by the principal for a Type 3 assignment because you have indicated that they will be engaged under verbal agreements which cannot, for practical purposes, be under terms and conditions comparable to the Agreement. The principal indicated during a telephone conversation between the ATO and the principal that they could not readily provide further information with respect to the terms and conditions of this type of assignment.