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Ruling

Subject: Employee or Contractor

Question 1: Is the employee and employee of the taxpayer for the purpose of section 12-35 of Schedule 1 of the Tax Administration Act 1953 (TAA)?

Section 12-35 of the TAA states:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Paragraph 6 of Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) provides that the term 'employee' is not defined in the TAA. For the purposes of withholding under section 12-35 of the TAA, the word 'employee' has its ordinary meaning.

TR 2005/16 outlines the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

An employee is generally a person who is in a master/servant relationship or who works under a contract of service.

There is no single objective test to ascertain whether someone is an "employee". The High Court in Stevens v Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16 stated that when determining someone was an employee, "the totality of the relationship between the parties must be considered" and that it is a "question of degree for which there is no exclusive measure".

More recently, Hill J in De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd & Ors v FC of T (1997) 36 ATR 600 stated:

"Although no single factual matter is determinative, it is the cumulative weight of all the facts which leads me to this conclusion."

The courts have, however, identified a number of characteristics which are indicative of a person being an employee, as opposed to an independent contractor. Some of these factors are outlined below:

(a) Creation of goodwill or saleable assets

These indicia have been identified by the Courts as being important to establishing whether a contract of service or for services is in existence. Sheller JA in Vabu Pty Ltd v FC of T (1996) 96 ATC 4898 at 4902 highlighted that "the creation of goodwill or saleable assets in the course of work" indicated that a contract for service as opposed to a contract of service existed.

(b) Place of performance of work

The fact that employees have to provide premises to work at their own cost is indicative of a contract for service rather than a contract of service (Stevens v Brodribb Sawmilling Company Pty Ltd CLR at 37).

This position is supported by the Commissioner as set out in Taxation Ruling TR 1999/13 which states the 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.

(c) Provision of equipment used

The provision of one's own equipment is indicative of a contract for services rather than a contract of service (Stevens v Brodribb Sawmilling Company Pty Ltd)

(d) Payment

An employee is generally paid a fixed salary or wage calculated at an hourly rate. Independent contractors normally are paid by reference to the completion of a specified task or by volume of work done (Vabu's case).

The importance of this factor was highlighted by the New South Wales Court of Appeal in Vabu's case. In that case, the couriers were paid a certain amount of each successful delivery, as well as a travelling rate for each kilometre travelled in making the delivery.

In holding that the couriers were contractors, not employees, Meagher JA at 4900 stated:

"Another, very important, indicium is that the couriers received no wage or salary. Normally, if they were true employees, one would expect there to be a certain sum each day, week or month. The documents provided for no such thing. They are paid a prescribed rate for the number of successful deliveries they make."

(e) Risk

Employees bear little, if any, of the risks of the business in which they are employed. The risk of profit and loss is carried by the employer. The employee is not responsible for loss occasioned by the employer arising out of the employee's workmanship or negligence. An independent contractor, however, bears the risk of profit and loss. Meagher JA in Vabu summarised the position as follows:

"There are several considerations which make me think that on balance the couriers are not employees. In the first place, they supply their own vehicles, be they bicycles, motor bikes, cars, utilities or vans. They have to bear the expense of providing for and maintaining the vehicles. They pay for running repairs, petrol, insurance and registration. The company provides telephones and uniforms and signage. The courier's expenses are very considerable. Again, to quote McKenna J in Ready Mixed Concrete (South-East) Limited v Minister of Pensions & National Insurance (1968) 2 QB 497 at 526:

'The ownership of the assets, the chance of profit and the risk of loss in the business of carriage are his and not the company's.

A consideration which points to the couriers being independent contractors

(f) Work hours

Taxation Ruling TR 1999/13 states that employees generally have standard work hours while independent contractors set their own work hours.

(g) Control

The classic test for determining whether the relationship of employer and employee existed was the exercise of control over the manner in which work was performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, while control is important, it is not the sole indicator of whether or not a relationship is one of employment.

In Zuijs v.Wirth Brothers Pty Ltd (1955) 93 CLR 561 the High Court articulated the significance of control in an employment relationship in the following way:

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.

Dixon J states in Humberstone v Northern Timber Mills (1949) 79 CLR 389 that:

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 the performance of his work resided in the employer so that he was subject to the latters orders and directions.

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.

(h) The deduction of income tax and superannuation

The deduction of income tax and superannuation contributions from a person's remuneration for work points towards that person working as an employee rather than an independent contractor.

(i) Delegation

In Australian Mutual Providential Society v Chaplin (1978) 18 ALR 385 the power to be able to delegate was considered to be an important factor in deciding whether a person is an employee or an independent contractor. Generally, the ability to delegate work to another person is an indicia of a contract for service. Independent contractors tend to delegate work to other persons.

(j) Integration

The question of whether the work is integrated into the business is another factor to consider. The presence of other workers doing the same work for the principal would indicate that the worker is an integral part of the business. In Stevenson, Jordan and Harrison Ltd v MacDonald and Evans [1952] TLR 101 at 111 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."

(k) A results contract

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 at 4334, 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."

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.

Is the employee an employee or a contractor?

Control over work

The employer has an implied right within industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit.

In this case the employee is told where to work, when to work, what to do by the Taxpayer and cannot get someone else to do their work for them. The employee is employed as an employee with the Taxpayer therefore has limited independence in the way they work.

Commercial risks

An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee.

The employee works onsite in the business office of the Taxpayer, the employee is not liable for rectifying any work as the Taxpayer holds professional indemnity insurance for them if they make a mistake, the company is held responsible.

Ability to delegate

An employee performs the work personally and generally cannot subcontract the work to someone else.

In this case the employee serves the business of the Taxpayer; they are not running them own business inside of the business of the Taxpayer and is unable to get someone else to do them work for them.

Tools and equipment

The employer, except when specifically agreed otherwise, usually provides tools and equipment.

In this case the employee does not need to provide any substantial equipment of their own to fulfil their tasks and responsibilities. The Taxpayer provides the office, the telephone, the computer database, and the use of a company car.

Payment

Payment is often based on the period of time worked, but an employee can also work on 'piece rates' or commission.

In this case the employee is paid an hourly rate plus a commission.

Tax was deducted from their wage and payment summaries where issued.

The above characteristics are akin to that of an employee and not a contractor where often payment is made based on a result being achieved.

Conclusion

It is the Commissioners view that as a whole the indicators favour the worker being characterised as an employee at common law and for the purposes of the TAA.

In deriving this decision, the Commissioner took into account the fact that the principal had the ultimate right to exercise control over the worker. The employer allocated work on the basis of its business requirements and the work was to be completed to a standard determined by the employer.

The overall evidence suggests that the worker served the principal in the business and was not conducting a business of their own. The worker was hired to perform the work personally. Work was directed and scheduled by the principal and the commissions were calculated in accordance with the contractual agreement.

The employee is therefore an employee of the Taxpayer for the purposes of section 12-35 of Schedule 1 of the TAA. Therefore you are required to withhold and amount from their salary and wages and commissions.

Question 2; Is the employee an employee of the Taxpayer pursuant to section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Employee under the SGAA

The Superannuation Guarantee (Administration) Act 1992 (SGAA) provides that an employer must make the prescribed minimum level of superannuation support for its employees (unless the employees are exempt employees) or pay the Superannuation Guarantee Charge.

Subsection 12(1) of the SGAA defines employer and employee as:

Subject to this section, In this Act, employee and employer have their ordinary meaning. However for the purposes of this Act, subsections (2) to (11):

(a)     expand the meaning of those terms; and

(b)     make particular provision to avoid doubt as to the status of certain persons..

In so far as subsection 12(1) of the SGAA, a worker will be an employee for SG purposes if he or they is a common law employee.

In addition, subsection 12(3) of the SGAA expands the ordinary meaning of the term employee to include persons who are contracted wholly or principally for their labour.

It is therefore necessary to consider not only whether there is a common law relationship of employer-employee between the parties, but also, if the common law tests are not met or are inconclusive, whether the extended definition of employee in subsection 12(3) of the SGAA applies.

Employee

As outlined in question 1 above, it is the Commissioners view that as a whole the indicators favour the worker being characterised as an employee at common law and for the purposes of the SGAA.

In deriving this decision, the Commissioner took into account the fact that the principal had the ultimate right to exercise control over the worker. The employer allocated work on the basis of its business requirements and the work was to be completed to a standard determined by the employer.

The overall evidence suggests that the worker served the principal in their own business and was not conducting a business of their own. The worker was hired to perform the work personally. Work was directed and scheduled by the principal and the commissions were calculated in accordance with work the contractual agreement.

Extended definition of employee

Notwithstanding that we consider that the employee is an employee in the ordinary meaning of that term, subsection 12(1) and subsection 12(3) of the SGAA allows a contractor to be included as an employee for the SGAA purposes, provided the contract is wholly or principally for that persons labour.

A contract is principally for labour if the labour content exceeds 50% of the value of the contract.

Therefore contracts which, in the main, provide for payments in respect of the supply of goods, materials, or hire of plant or machinery and any other related costs incurred by the recipient of such payments in the course of performing work under the contract are not principally for labour.

With the introduction of Australian Business Numbers (ABNs) and the Goods and Services Tax (GST) under The New Tax System, there have been no amendments to the definition of employee in the SGAA. The ABN and GST registration will not alter the essence of the relationship between the payer and the worker.

In the case at hand, the nature of the relationship between the principal and the worker indicates the relationship was essentially a contract for the supply of labour. The employee was expected to perform the work delegated to them. The employee was remunerated principally for them labour; and was remunerated by wages and a commission.

As such, the employee is considered to be an employee under subsection 12(1) and subsection 12(3) of the SGAA.