Edited version of private ruling

Authorisation Number: 1011688289684

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Ruling

Subject: Employee or contractor

Question 1

Is the work that you perform on behalf of Company X considered to be performed as an independent contractor?

Answer: No, you are considered to be an employee.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2010

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.

In the recent year you applied for a private ruling to determine whether your work for Company X was considered to be performed as an employee or an independent contractor.

You sought clarification of the matter following a review of your tax return for the 2009-10 income year which disallowed some of your claims for business expenses on the basis that you were an employee of the company and not an independent contractor.

This decision was, in part, based on telephone discussions with the payroll officer at Company X in which they advised that you were an employee contractor of the company.

In your private ruling application you stated your belief that you were a contractor and should be entitled to claim business expenses.

With respect to your work, you advised that you are engaged by Company X and are contracted out by them to provide IT services to their various different clients.

You work for a given client under a contract with a six month duration.

At the end of the six month period you may be offered an extension of contract with the same client, a contract with a different client, or no contract at all.

In your application you advised that, although remittance of your charges is received from Company X, you have worked for various different companies who are Company X clients.

In addition to your private ruling application, you supplied a copy of the contract of service terms and conditions between yourself and Company X.

You referred to several points in the contract which you believe support the argument that you are a contractor.

Specifically, you referred to the following points:

· You are employed as a contractor on a casual/temporary basis. You will be employed on an assignment by assignment basis. Each shift will constitute a new contract of employment.

· You are responsible for and must pay all expenses incurred in providing the services under this assignment.

· As a casual/temporary your employment with Company X ends at the end of every shift.

The following points from the contract were noted with respect to your engagement with Company X:

Upon the completion of an assignment, Company X is under no obligation to offer you any further assignments and, if future assignments are offered, they is no requirement or guarantee that they will be on the same terms or same rates as previous assignments.

You are engaged on an hourly or daily basis, as required by the Company X client for whom you are working. On each assignment, you are not guaranteed a certain number of hours or a regular pattern of work. Your hours of work are determined by the client, and you agree to work at their direction.

You are entitled to overtime payments. If applicable, overtime, shift penalties or other allowances will be calculated in accordance with the provisions of any relevant awards or Industrial Instrument. If no such award exists, you will be compensated at your ordinary hourly or daily rate, for the minutes of each hour worked.

You are remunerated on an hourly or daily basis depending on the assignment. Your hourly rate includes a loading in lieu of annual leave, sick leave, personal/carer's leave, severance pay, notice on termination, long service leave, public holidays and any other benefits prescribed by statute.

Payment for your services is made by Company X on a weekly basis upon receipt of a correctly completed timesheet.

For eligible employees, payment of superannuation is governed by, and will be in accordance with, the Superannuation Guarantee Legislation.

Although you are responsible for payment of all expenses, Company X or its client may pay, reimburse or contribute to a reimbursable expense (including travel expenses) properly incurred by you or on your behalf with prior agreement from Company X.

Your employment may be terminated immediately by Company X for various reasons which constitute a breach of contract, or misconduct. Otherwise, your employment may be terminated for any other reason with one hour's notice.

You agree to adhere to the relevant employee policies, rules and regulations of Company x and its clients and to obey all lawful commands and reasonable instructions.

You warrant, prior to accepting any assignment, that you have the relevant skills and qualifications necessary to undertake the job, as well as all of the required licences, registrations and accreditations.

Where the services you perform for a client are deemed unsatisfactory in the opinion of the client, you agree to make good all defects in the performance of services.

You will abide by the confidentiality policies pertaining to Company X and its employees.

For 6 months from the cessation of your employment with Company X, you agree not to seek or accept employment with any client, former client or similarly associated client or employee of Company X who you worked for, or were introduced to, by Company X in the past 12 months, without the written consent of Company X, which will not be unreasonably withheld.

Regarding intellectual property, when performing a service, you will ensure that you have all required licenses and permission to use any intellectual property. Its states that ownership of all inventions, improvements, designs, creations, developments and other intellectual property relating to or deriving from any work you have performed shall be the property of Company X and/or the relevant client and you agree to waive any moral rights you might have in favour of Company X or its clients.

Company X is responsible for providing you with statutory Worker's Compensation Insurance.

Regarding Company X's OH&S policy: you must also familiarise yourself with, and abide by, the OH&S policies of the client for whom you are working at any given time.

The terms and conditions refer to you as a casual/temporary employee.

In addition to your main contract with Company X, you also provided a copy of your assignment agreement with one of Company X's clients, Client A.

The assignment agreement covers such details as your hourly rate of pay, person you report to, period of assignment and start and end dates of assignment.

Under the heading of key responsibilities/objectives, the agreement says that these are "as directed by the client".

This assignment agreement, although only relevant to one job for one client, was representative of the contracts that are signed by you every six months when accepting a job.

In addition to this information, you also provided further information in respect to your circumstances over the telephone.

You advised that you did not believe you had any leave entitlements under the terms of your agreement and that you choose the jobs you want to work and decline jobs that you are not interested in taking.

You advised that you are not required to wear a company uniform or identification of any type when attending a job.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-110

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Employee Vs Contractor

The employer-employee relationship is a contractual one often referred to as a 'contract of service' which can be contrasted with a principal/independent contractor relationship typically referred to as a 'contract for services'. That is, an independent contractor generally contracts to achieve a result, whereas an employee contracts to provide labour (to enable the employer to achieve a result).

The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services.

A determination of whether an individual under a specific arrangement is an employee cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of that individual. It is the totality of the relationship that needs to be considered. 

Taxation Ruling TR 2005/16: Income tax - Pay As You Go withholding from payments to employees, (TR 2005/16) at paragraph 7, 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.

TR 2005/16 has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

1. Terms and circumstances of contract - a clause in a contract that purports to characterise the relationship between the parties as that of principal/independent contractor and not that of employer/employee must be considered with all the other terms of the contract. That is, the parties cannot deem the relationship between themselves to be something that it is not by simply giving it a different label.

2. Control test - the degree of control which a person who engages another person can exercise over that person is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. A common law employee is told not only what work is to be done, but how and where it is to be done. However, the mere fact that a contract may specify how the contracted services are to be performed does not necessarily imply an employment relationship.

3. Contract for results - 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 services. Other indicators of a contract for services include where the person is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome, the consideration is for a fixed sum on completion of the specified services which is the result, as opposed to an amount paid by reference to hours worked. 

4.  Delegation - if a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result.

5.  Risk - where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor also often carries their own insurance and indemnity policies. 

6. Provision of tools/payment of own expenses - the provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor. Further, the Tax Office considers that an employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car.

7. Other - other indicia suggesting an employer-employee relationship include:

- the right to suspend or dismiss the person engaged;

- the right to the exclusive services of the person engaged;

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

- provision of other benefits prescribed under an award for employees; or

- a requirement that a worker wear a company uniform.

Application to your circumstances

In your case, you are engaged by Company X to provide services for its various clients. You are assigned to a particular client under a six month contract. At the expiry of each six month contract, you may be offered a contract extension with the same client, a new six month contract with another client, or no contract at all. Similarly, you are under no obligation to accept a contract with a particular client if the job does not suit you.

During a review of your 2009-10 tax return, some of your claims for business expenses were disallowed. You claimed these expenses under the belief that you were entitled to them as an independent contractor carrying on a business in accordance with section 328-110 of the Income Tax Assessment Act 1997. However, the ATO determined that you were, in fact, an employee of Company X in the 2009-10 income year. This decision was, in part, based on discussions with Company X during which, the payroll officer advised that you were an employee contractor.

In an effort to clarify your position for future tax returns and your entitlement to claim business expenses, you applied for a private ruling to determine whether the ATO considers that you are an employee or an independent contractor. Along with your private ruling application, you supplied a copy of the contract of service terms and conditions between yourself and Company X.

Based on the information provided in the contract, the Commissioner deems that you are an employee of Company X and not an independent contractor. In your private ruling application, you referred to a clause of the contract which states that "you are employed as a contractor on a casual/temporary basis. You will be employed on an assignment by assignment basis. Each shift will constitute a new contract of employment". You believe that the use of the word "contractor" supports your argument that you are not an employee. However, the clause also states that you are "employed" on a casual/temporary basis. The fact that your work is done on an assignment by assignment basis is more to do with the nature of the work and the demand for services and is indicative of your position as a casual employee rather than a contractor.

In fact, another clause of the contract covers awards and states that you may be employed under an award depending on which state or territory you work in. It states specifically that "you are employed as a casual/temporary employee for the purposes of any such award".

If we consider the terms and conditions of your contract more specifically in relation to the tests outlined in TR 2005/16, your position as an employee of Company X is clarified. With respect to the control test, the contract indicates that your hours of work are determined by the client and that you will agree to work at their direction. It also indicates that you will only work outside of ordinary working hours with the approval of the client. This indicates that, unlike an independent contractor, you are advised how and when your work is carried out. You do not have the freedom to work as you choose and your work must be carried out at the client's direction.

The contract covers policies and procedures and specifically states that "You agree to adhere to the relevant employee policies, rules and regulations of Company X and its clients and to obey all lawful commands and reasonable instructions of Company X and its clients". Again, this is indicative of a level of control held by Company X.

Regarding the third test, contract for results, the Commissioner notes that, although you are engaged on an assignment by assignment basis, you are not engaged under a contract for results. You are paid at an hourly rate following submission of a timesheet. Your hourly rate is set out in the assignment agreement and may be dependant on the client for whom you are working. Unlike an independent contractor, you are also entitled to overtime payments according to a particular clause of your contract.

The fourth test, the delegation test, again reinforces the view that you are an employee of Company X. You must personally perform all required work for Company X's client, at the direction of that client. The assignment agreement is between yourself and Company X and you do not have the right to employ third party means or labour in order to complete your work. The agreement in question is for yourself personally, as the nominated consultant, and does not cover any other person.

Your work bears little or no risk arising out of injury or defect in carrying out your work. According to this risk test, this is more indicative of a person being an employee. The OH&S clause clearly states that Company X provides you with mandatory Workers Compensation Insurance, meaning that you are not required to take out your own personal indemnity insurance policy.

With respect to the provision of own tools/payment of expenses test, you the clause of your contract which states that, "you are responsible for, and must pay, all expenses incurred in providing services under the assignment". While this initial statement is indicative of an independent contractor under this particular test, the clause goes on to state that you are also entitled to reimbursement of your expenses, including travel expenses.. Reimbursement is conditional on the expenses being incurred at the request of the client, substantiation and written approval from the client. In order to claim reimbursement of expenses, you are required to complete a Company X Expense Form. As outlined in TR 2005/16, entitlement to reimbursement of expenses is generally indicative of a person's status as an employee.

In addition to these main tests, as outlined in TR 2005/16, there are other significant indicia which confirm the view that you are an employee. In a telephone conversation you advised that you were not entitled to leave provisions such as sick leave, annual leave and long service leave. However, another clause of your contract states that your hourly rate of pay includes a "loading in lieu of annual leave, sick leave, personal/carers leave, severance pay, notice on termination, long service leave, public holidays and any other such benefits prescribed by statute and available to full time and part time employees". This is clearly indicative of your status as an employee as an independent contractor would not be entitled to such a loading.

Similarly, the contract states that Company X pays superannuation in accordance with superannuation guarantee legislation for all eligible employees. This is another indicator that you are engaged by Company X as an employee and do not operate as an independent contractor.

Your contract covers termination and clearly states that Company X has the right to terminate your employment instantly in the case of a contract breach or another serious offence. Otherwise, Company X has the right to terminate your contract with one hours notice. TR 2005/16 states that the right to dismiss the person engaged is indicative of that person's status as an employee.

Finally, your contract covers restraint and states that "from six months from the cessation of your employment with Company X you agree not to seek or accept employment, directly or indirectly, with any client, former client, successors of a client, employee or former employee of Company X who you worked for or were introduced to by Company X in the previous twelve months, without the written consent of Company X". TR 2005/16 states that, where a company has the right to exclusively use the services of the person engaged, that person is likely to be an employee. While your contract does not specifically states that Company X has exclusive rights to your services, the restrictions placed on you and your ability to work for associates of Company X in the period following cessation of your employment indicates, again, that you are an employee and not an independent contractor.

Based on the above factors, the Commissioner is satisfied that the work you perform for Company X is that of an employee contractor and not an independent contractor. You perform under a "contract of service" rather than a "contract for service". As such, you are not entitled to a deduction for business expenditure.