Edited version of private ruling

Authorisation Number: 1011668363030

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Ruling

Subject: Employee or Contractor

Would you be regarded as an independent contractor or an employee in respect of services provided to a government agency?

Independent contractor.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

We considered these to be the relevant facts:

· You applied for a private ruling to determine your status as either an employee or a contractor.

· In your application, you have provided a signed Contract Agreement between yourself (referred to as the Contractor) and the government agency (referred to as the Customer).

We sent you a letter requesting further information in order to determine your status as either an employee or a contractor.

No response was received. A seven day reminder letter was sent.

You responded in a letter.

In your response, you have provided details of your work in the government agency's office and the way in which it is carried out.

If required you would discuss the issues with the agency. You would perform you duties within the time specified.

Your contract with the agency requires that you provide you services for a certain number of hours each week. Your contract does not refer to the achievement of a specified result. You are not paid a prescribed rate for the number of items you produce.

Your services are provided for the sole benefit of the agency. You do not provide services to members of the public. Copyright in your work is the property of the agency.

Further, your response was 'No' with regards to whether you have the right to pay another person to do the work instead of yourself or are you an apprentice and do you have to provide any equipment, tools of trade to perform the work or are you liable for the cost of rectifying any defect in the work performed.

You state that if you were required to amend any of your work, the time taken to do the amendments is included in the time for which you are paid. Amending your work is an inevitable aspect of the work that you do. You do not personally incur any costs to rectify the work.

You also advised that it would not be reasonable to suggest that an independent third party would view you as an entity conducting its own business as you are not listed in the business pages of the telephone directories. You do not have a website to advertise. You do not provide services for anyone else.

Finally, you also advised that the description of a person in an employment agreement as a "contractor" does not determine the nature of the relationship.

Reasons for decision

Summary

Based on the information you have provided we consider that you are an independent contractor, rather than an employee, in the income years in question.

Detailed reasoning

Employee Vs Contractor

There is no one factor that determines whether a person is an employee or an independent contractor. A number of factors must be considered.

It is important to determine whether a worker is under a contract for service or a contract of service at the outset as it results in certain obligations for the payer and the payee. This decision cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of the worker.

At either end of the spectrum, it is a simple matter to recognise the classic employer/employee relationship and independent contractor. It is sometimes difficult to define the nature of the relationship where the factors are not so clear. The emergence of performance-based contracts, flexible working hours and work from home arrangements represent a trend that is blurring the traditional distinctions between employee and independent contractor.

Whether the true nature of an arrangement between a payer and payee is that of employer/employee or principal/independent contractor is a determination which must be made by reference to the various indicators developed by the Courts. These indicators have been collated in Taxation Ruling TR 2005/16.

Paragraph 7 of TR 2005/16 states:

Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

The ruling goes on to provide the key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

1. Terms of engagement

The terms and conditions of the contract whether express or implied, in the light of the circumstances surrounding the making of the contract, whether verbal or written, 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, therefore, be persuasive indicators. For example:

· provision of benefits such as annual, sick, and long service leave

· provision of other benefits prescribed under an award for employees

· payer prescribed times and location for the performance of work

· remuneration in the form of a salary or wage

· the worker uses assets and materials provided by the payer or is reimbursed, or paid a compensatory allowance, for expenses incurred in respect of use of own assets and materials, and

· payer discretion (within the constraints of industrial relations laws) 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.

The case Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179 emphasises the point that the characterisation of a contract is not a matter for the sole discretion of the parties to the contract.

Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

In your case, you provided a signed copy of the contract agreement between yourself and the government agency.

The contract agreement defines the government agency as the 'Customer" while you are defined as the "Contractor".

As advised by you in your response, 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.

However, the contract agreement states that you will provide your services for a fee and will be paid upon presentation of a fortnightly invoice, whereas a clause states that you will not be covered by the government agency for workers compensation and accordingly responsibility for any insurance cover required by you including public liability or employer's liability to cover liabilities that may arise during the performance of the contract will rest with you.

Also, the contract agreement does not contain any provisions for annual, parental, bereavement or sick leave nor is there any mention of Superannuation and it also states that you will provide your services for a period of twelve months.

Accordingly, this is a clear indicator that the arrangement constitutes an independent contracting arrangement.

2. The 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 on 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 contracts for services.

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:

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.

Likewise, the High Court in Zuijs v. Wirth Brothers Proprietary Ltd (1955) 93 CLR 561 described the significance of control in the following way in the context of skilled employment where the nature of the work performed left little scope for detailed control:

What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters.

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. In these circumstances, it is to be expected that the employer will leave the performance of the activity up to the employee.

In your case, you are informed by the government agency your work will be required by a specified. You would then prepare the material. In the course of carrying out that work you would read relevant material. If required, you would discuss the issues with the government agency. You also state that you performed your duties within the time specified.

With reference to your profession, it would not be considered unreasonable for you to be able to exercise a high degree of direction and control over the work. These factors indicate that it is a contract for service.

3. Results Contracts

Where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for service.

In a contract for services, 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 (but may be) dependent on, and referable to, the completion of specified services.

An independent contractor normally renders accounts payable by invoice and possesses his/her own ABN, and payment would be for the performance of the contract, that is, payment for a result.

In your case, the Contract Agreement states that the professional work to the government agency (the customer) or submitted to the customer is deemed to be the deliverable product under this contract.

You do possess an ABN and the Contract Agreement states that you will be providing your services in return for an agreed payment of $X per week which includes all out of pocket expenses and on costs, unless otherwise agreed to by the government agency with prior approval.

Further, the contract agreement states that you have to provide invoices on fortnightly basis and will be paid with fourteen days of receipt of the same.

These indicators are more consistent with a contract for service, that is, an independent contractor.

4. Hours of Work

An employee generally works standard or set hours. An independent contractor, on the other hand, generally sets their own hours of work.

In your case, you will provide your services for three working days per week of at least eight hours with all additional hours as directed by the government agency and that you will work in the government agency's office. You choose the times and dates that you wish to work and the government agency does not operate a roster or schedule detailing what times you should work.

This is also a clear indicator that the arrangement may constitute an independent contracting arrangement.

5. Business Risk and Expenses

Where the worker bears little or no risk for 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. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more he or she is likely to be regarded as being independent. Typically, a worker who derives piece rate payment and sustains large outgoings would be so exposed.

The higher the proportion of the gross income which the worker is required to expend in deriving that income, and the more substantial the assets which the worker brings to his or her tasks, the more likely it is that the contract is for services.

In your case, you are not covered by the government agency for workers compensation and accordingly responsibility for any insurance cover including public liability or employer's liability to cover liabilities that may arise during the performance of the contract will rest with you.

Again, this indicator would be more indicative of the arrangement constituting an independent contracting arrangement.

6. Place of Performance

Workers under a contract of service will generally perform the tasks on the payer's premises using the payer's assets and equipment. A contractor, on the other hand, generally provides all their own assets and equipment.

In your case, you are required to work from the premises of the government agency.

7. Integration

In Montreal v. Montreal Locomotive Works (1927) 1 DLR 161 at 169 Lord Wright said:

it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior.

Similarly, in Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans (1952) 1 TLR 101 at 111 Denning LJ said:

... under a contract of service, a man is employed as part of the business, and his work is done as an 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.

From these statements, the notion of an integration test (or organisation test as it is sometimes called) arose. While the factor is not determinative, this underlying distinction drawn between an employee and an independent contractor may be a useful aid or reference point in determining the status of a worker, i.e., is the worker working on his or her own account (independent contractor) or in the service of the payer (employee)?

Therefore, integration should not to be viewed as an alternative test, but rather as another relevant consideration to be taken into account in conjunction with lawful authority to command and other relevant factors.

In your case, you advised that it would not be reasonable to suggest that an independent third party would view you as an entity conducting its own business as you are not listed in the business pages of the telephone directories. You do not have a website to advertise. You do not provide services for anyone else.

However, there appears to be a strong desire to separate your operations from the operations of the government agency. You do derive income from other sources even though that work is unrelated to your work with the agency. Further, you will be paid separately for your services upon receipt of invoices by you. You are required to send accounts for payment to the government agency and as such not included in the payroll list of the government agency.

This is indicative of your being an independent contractor.

Conclusion

With consideration of all the facts presented in this case and with reference to the indicators provided in Taxation Ruling TR 2005/16, it is clear that you are an independent contractor and not an employee of the government agency.

As you are considered an independent entity, you have an obligation to manage your own tax affairs for example, PAYG withholding, GST and superannuation.