Edited version of private ruling

Authorisation Number: 1011742804236

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Ruling

Subject: Employee v contractor - bailment agreement

Question

Are you considered to be an employee for income tax purposes?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are engaged as a driver for Company A.

You do not own a company vehicle.

You rent a fully licensed and registered vehicle owned by the company in accordance with the terms and conditions set out in Company A's Bailment Agreement.

You applied for a private ruling to determine whether you would be considered an employee for income tax purposes.

You stated your contention that the Bailment Agreement provided by Company A falls short of its legal requirements.

You believe that the document is being used as a way of circumventing current legislation to deny you legal entitlements with regards to superannuation, leave and workers compensation.

You consider that you are an employee of Company A based on the following factors:

Each task that an individual driver does during their shift is controlled by the company.

At the commencement of each shift, a driver is given a predefined route that they must follow and individually allocated jobs that must be completed. A driver can not vary his manifest or work allocation without the prior approval of the Company A base.

Drivers have no say in the setting of the rental fee applied to each job, nor can they canvass for their own work, so they are limited in their earning capacity to the work that is allocated to them via the company.

At the end of each week drivers are required to submit an invoice to the company for payment. The total for all jobs performed by the driver during that week is reconciled with the jobs that were allocated to that driver and the company then deducts commission, credit card fees and bond from the gross amount owing before paying the net amount to the driver.

It is common practice for drivers to be paid on a weekly basis via direct credit, although the Bailment Agreement makes no mention of how and when a driver will be paid.

In the current situation, drivers do not pay the rental fee to the company. Rather, the fee is deducted from their gross earnings before payment is made. You believe that this is in contrast to a usual bailment agreement.

There are various types of vehicles on Company A's fleet ranging from sedans through to 53 seater coaches, however the Bailment Agreement does not provide any specific information on the bailment vehicle other than to say it is a fully licensed and registered vehicle.

Drivers do not always use the same vehicle and can swap vehicles several times daily or, indeed, during a shift. You argue that the Bailment Agreement can not be legally binding hen the subject of the agreement is not listed or defined.

Company A drivers do not take legal possession of the vehicles that they drive due to the fact that one vehicle can have three or more drivers throughout the course of one day.

The Bailment Agreement does not clearly state, define or even outline the duties, services or obligations required of the bailee.

With regards to the Company A's vehicles, you state:

· All vehicles have Company A signage attached to them and all drivers are required to wear a company uniform with similar signage.

· All vehicles are registered to Company A.

· All maintenance and repair costs are met by Company A.

· Company A pays for all fuel costs.

Based on the above factors, you believe that the Bailment Agreement is ambiguous and intended to deceive.

You advised that the company had issued a "sign it or no job" ultimatum when questioned by drivers about the Bailment Agreement and that some drivers had even signed the Agreement under duress.

In support of your claims that any vehicle can have a number of different drivers during any one period, you enclosed a copy of a vehicle run sheet. In the case of this particular vehicle, you noted that the vehicle had no less than five drivers in a 10 day period.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35.

Reasons for decision

Employee v Contractor Bailment arrangements

The Commissioner's views on who is an employee for Pay As You Go withholding purposes are set out in Taxation Ruling TR 2005/16.

The term employee is not defined in the Taxation Administration Act 1953 (TAA 1953). For the purposes of withholding under section 12-35 the word 'employee' has its ordinary meeting. 

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 itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

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. In World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327; (1992) 27 NSWLR 377 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'.

Similarly, the couriers in Vabu Pty Limited v FC of T 96 ATC 4898; 33 ATR 537, were engaged to perform a result, the delivery of parcels, etc, rather than engaged to perform labour. They were thus employed in their own business, on their own account, and were not employees of the business conducted by the appellant in that case. Their contracts were not contracts wholly or principally for their labour.

There are circumstances in which the relationship between a person who engages another to perform work and the person engaged does not give rise to a payment for services rendered or provision of labour but rather a payment for something entirely different, such as a lease or 'bailment'. In these circumstances, a person enters into a lease or bailment for the use of property owned by another person, and the payments are made from the lessee or bailee to the lessor or bailor. Consequently, the lessee or bailee, rather than being a provider of services to the owner of the asset, acquires a right to exploit that asset for their own benefit in return for a 'rental' payment to the owner. This does not give rise to an employer/employee relationship for the purposes of the TAA 1953.

The dictionary meaning of bailment is: the temporary placement of control over, or possession of Personal Property by one person, the bailor, into the hands of another, the bailee, for a designated purpose upon which the parties have agreed. During the specific period a bailment exists, the bailee's interest in the property is superior to that of all others, including the bailor, unless the bailee violates some term of the agreement.

A bailment involves only a transfer of possession or custody, not ownership. For example, a bailment is created when a parking garage attendant, the bailee, is given the keys to a motor vehicle by its owner, the bailor. The owner, in addition to renting the space, has transferred possession and control of the vehicle by relinquishing its keys to the attendant.

A common form of bailment relationship is that of owner and taxi driver. In the taxi industry, some drivers who operate under a bailment agreement make a payment to the owner allowing them to use the taxi to drive. These payments may take the form of lease payments or a percentage of shift takings. In FC of T v. De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd & Ors 98 ATC 4466; (1998) 38 ATR 609; (1998) 82 FCR 507, the Full Federal Court held that a taxi licence owner and taxi drivers were not in a relationship of employer and employee. The relationship was rather one of 'bailment', even though the licence owner had a degree of control over the drivers' work. In this case it was also stated that: 'In the present case, even if there could be said to be a payment made by the operators to the drivers, contrary to the facts, that payment could not be said to be one for the labour of the drivers.'

Application to your circumstances

In your case, you are a driver for Company A and you rent a fully licensed and registered vehicle owned by Company A in accordance with the terms and conditions set out in the Bailment Agreement.

Your payment is based on the submission of a tax invoice and is a percentage of the actual fares collected. Upon weekly submission of the tax invoice to the company, the total for all jobs performed by you during the week is reconciled with the jobs that were allocated by Company A. Company A then deducts commission, credit card fees and bond from the gross amount owing before making payment. As your payment is based on the number of allocated jobs you complete each week, it is clear that you are paid on a results basis. Regardless of the fact that Company A exercises a degree of control over how their vehicles are used, and regardless of the fact that you may 'rent' a number of different vehicles from the company over the course of a day or, indeed, a shift, the fact remains that you do rent vehicles from the company and the right to drive these vehicles for income earning purposes. Based on the outcome of the cases discussed above you are not considered to be an employee.

Although you have expressed concern about the wording of the Bailment Agreement prepared by Company A, it is clear from the definition of 'bailment', the nature of the industry that you work in and your working arrangement that you are in a bailment arrangement. As such, you are not considered to be an employee for income tax purposes in this arrangement.

The Commissioner considers that the grievances you have described regarding your Bailment Agreement and working conditions are, in large part, matters to be considered by Industrial Relations and not the ATO. If you wish to further pursue your concerns relating to the alleged deception of Company A or the legal requirements of your Bailment Agreement, please contact Industrial Relations.