Edited version of private ruling

Authorisation Number: 1011762476714

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Ruling

Subject: Employee or Independent contractor

Question

Are the sub-contractors engaged to complete work on XYZ contracts, employees or independent contractors of XYZ Pty Ltd?

Answer:

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:

XYZ Pty Ltd - "the company" applied for a private ruling to determine the status of the sub-contractors as employees or independent contractors.

In your application, you have provided a copy of the Conditions of Engagement along with schedule of rates which governs the basis upon how sub-contractors are paid and their scope of works and it is the agreement upon which all contractors are contracted for.

You also advised that the company contracts to both companies and sole traders.

Some of the conditions as set out in the Conditions of Engagement are as follows:

The sub-contractor:

· is to co-ordinate their works with relevant trades,

· is required to rectify at no cost to the company any defect work carried out,

· shall replace at their expense any material damaged, lost or incorrectly installed,

· is required to provide tax invoice,

· is required to have their Public Liability Certificate of currency, Workers Compensation certificate of currency or Personal and Accident certificate of currency,

Over the telephonic conversation, you advised that the sub-contractors are not entitled to any annual leave, sick leave or long service leave.

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 year in question.

Detailed reasoning

Employee v. Independent Contractor

The distinction between employment and contract is the difference between a contract of service indicating an employee/employer relationship and a contract for service indicating a contractor/principal relationship.

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship).

The relationship between the independent contractor and the principal is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result).

An independent contractor works in his or her own business (or on his or her own account); an employee works in the service of the employer, that is, in the employer's business.

However, it is necessary to examine all the terms of the contract and to determine whether, on balance, the person is acting as an employee of another or is acting on his or her own behalf.

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.

TR 2005/16 item 7 provides:

'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:

Conditions 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.

All the facts of each case must be examined to determine whether it is an employment or contractor relationship. Most conditions, when viewed individually, will be equivocal as indicators of the true character of the contract.

In your case, you have provided a copy of the Conditions of Engagement between yourself and the sub-contractors as engaged by you.

The sub-contractor is contracted to complete works on XYZ Contracts by themself. The sub-contractor is to co-ordinate their works with relevant trades and is not entitled to any annual, sick and long service leave.

The sub-contractor will be paid upon presentation of tax invoices and is entitled to be reimbursed for expenses incurred in respect of use of own materials and/or equipments.

Upon consideration of the available facts and evidence, the provided Conditions of Engagement supports the notion that an independent contracting relationship exist with respect to the terms of engagement test.

Control

The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is 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 the case, Zuijs v. Wirth Brothers Pty Ltd (1955) 93 CLR 561 the High Court said:

'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.'

In the case, Humberstone v Northern Timber Mills (1949) 79 CLR 389, Dixon J stated:

'The essence of a contract of service is the supply of the work and skill of a man.'

In this case, there is no direct control exercised by XYZ Pty Ltd on the sub-contractors. The activities of the sub-contractors are not supervised and the work is completed in the sub-contractor's own time within time constraints imposed. If work is unsatisfactory the sub-contractor must go back and rectify it at their own cost and the sub-contractor, their agents or employees have the responsibility to fix the problem.

From the information supplied, there is no control exercised over the sub-contractor to perform their work.

Does the worker operate on their own account or in the business of the payer?

Another significant factor in establishing the nature of a contractual relationship at common law is the issue of whether the worker operates on their own account or as part of the business of the payer. This is sometimes viewed as a consideration of whether the workers would be viewed by a third party as carrying on their own enterprises as independent contractors or operators and whether they could be expected to generate goodwill in their own right.

In Hollis v Vabu, the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210;

'…the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.'

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.

In your case, each sub-contractor trades as a sole proprietor. The sub-contractor needs to have their own Public Liability Insurance, Worker's Compensation, Personal Sickness and Accident Insurance Cover.

The sub-contractors are regarded by the company as sole traders who provide services to others and do not work as an integral part of the Company's business.

These points would suggest that an independent third party is unlikely to view the sub-contractors as being employees of XYZ Pty Ltd or being integrated into the business, concern or enterprise of the Company.

This is indicative of the sub-contractors not being employees of the Company.

Results test

Under a results based contracts, payment is often made for a negotiated contract price as opposed to an hourly rate. The production of a specified outcome or result is not limited to the performance of one individual. The worker is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the result for which the parties have bargained.

Contracts which require the performance of identical services on a repetitive or cyclical basis are more indicative of employer/employee contracts.

In Vabu Pty Limited v FCT, a very important indicium was that the couriers received no wages or salary but were paid a prescribed rate for the number of successful deliveries they had made.

In your case, Clause 20 to 24 of the Conditions of Engagement sets out the basis of payment to be made to the sub-contractors and is set out in "Door installation rates".

Further, the sub-contractors are paid upon submission of tax invoices.

These points are clearly indicative of this arrangement not constituting an employment relationship.

Delegation

An unlimited power to delegate work is an important indication that the worker is an independent contractor. Delegation is generally implied in a contract for services where the emphasis is on result rather than 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.

In this case, the sub-contractor is a sole trader. He is free to employ or engage other labour to perform some or all of the works, and he is free to do work for others.

All these facts point to an independent contractor relationship.

Risk and rectification of work performed

Whether the worker is contractually obliged to be liable for the cost - in terms of time or money - for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor. Commonly an independent contractor or entity would solely bare the risk and responsibility of liability for their work if it is not up to an agreed standard and would be required to either rectify this defective work in their own time or at their own expense. This means that an independent contractor will often carry their own insurance and indemnity policies.

An employee on the other hand would bare no such responsibility and the liability for any defective work of the employee, either to a third party or otherwise, would fall on the employer in terms of the burden of cost or time for rectification.

As per Clause 8 of the Conditions of engagement, the sub-contractor is required to rectify at no cost to the company, any defect work carried out by the sub-contractor.

The materials damaged, lost or incorrectly installed shall be replaced at the sub-contractor's expense.

Accordingly, with respect to the risk test, the sub-contractors are considered to be independent contractors.

Provision of tools and equipment and payment of business expenses

Another consideration of relevance is whether the worker provides their own tools and equipment and pays their own business expenses. It has been held in a variety of cases that 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.

There are situations where, having regard to the custom and practise of the work, or the practical circumstances and nature of the work, very little or no tools of trade or plant and equipment are necessary to perform the work. This fact alone will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this - or any other indicator - depends on the particular circumstances, the context and the nature of the contractual work.

Unlike an independent contractor, an employee 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.

In this case, any reimbursable expenses with regards to purchasing of material and/or equipments by the sub-contractor need to be agreed with XYZ Pty Ltd prior to commencing a project.

Further, the sub-contractors are to carry their own Public Liability Insurance, Worker's Compensation and Personal Sickness and Accident Insurance Cover.

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 this case, the sub-contractors are required to perform at the various contract sites as advised by XYZ Pty Ltd.

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 the sub- contractors engaged by XYZ Pty Ltd are independent contractors and not employees of XYZ Pty Ltd.

As the sub-contractors engaged by XYZ Pty Ltd are considered to be an independent entity, they have an obligation to manage their own tax affairs e.g. PAYG withholding, GST and Superannuation.