Edited version of private ruling

Authorisation Number: 1011763806729

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Ruling

Subject: Contractor versus employee

Question 1

Are the people hired by Company A considered to be employees or contractors?

Answer

Contractors

Question 2

Is Company A required to withhold from payments made to the educators it hires pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No

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.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You run a small educational service.

Due to demand you have signed on a number of educators.

The number of students assigned to any one educator is usually limited.

The educators all have ABNs.

The educators cannot delegate their work to others.

This contract between these educators and Company A contain include the following conditions:

The educator is required to provide the service to designated students in their homes.

Due to the mobile nature of the service, the educator must have use of a car.

The educator will be required to supply their own resources and supplies.

The educator has a right to refuse the work for a new student at all times. However, once a student is accepted, the educator must continue with that student for specified period, unless prevented due to illness or incapacitation.

Once a new student has been accepted, the educator must contact the parent within X days to arrange a session time. If unable to make contact with the parent, the educator must contact Company A so that an alternative educator can be assigned.

The educators are expected to provide their contact details in case of cancellation or change of session time.

Company A gives no guarantee as to the number of students assigned to any one educator.

Remuneration is made at a set rate per session or as agreed.

The educators will be responsible for forwarding an invoice to Company A for their services. The invoice must include the educators name and ABN.

The payment of invoice will be directly deposited into the educators' bank account.

If a session is cancelled, the educator has the discretion to charge a fee.

When a student no longer requires the education service, the contract is cancelled and there is no guarantee of a new student replacement.

The educator must give Company A at least X weeks notice in writing if they cannot continue. It is expected that the educator will agree not to provide this service for any student recruited by Company A within a specified period from the date of termination.

All educators are now legally required to provide their own background check as a self-employed person and provide you with a 'Certificate of currency'.

The educators do not receive any entitlements such as sick leave or long service leave. If they require time off, they do so with no entitlements, nor do they receive any superannuation benefits.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1 to the TAA.

Reasons for decision

Summary

The educators engaged by Company A should be regarded as independent contractors rather than employees. Therefore, Company A is not required to withhold from payments it makes to the educators.

Detailed reasoning

Employee Vs Independent contractor

Under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) an entity must withhold an amount from salary, wages, commission, bonuses or allowance it pays to an individual as an employee.

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

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.

Whether a payee is considered to be engaged as an employee or as an independent contractor for taxation purposes is a question of fact that is looked at on a case by case basis. The contract is a matter for the parties to determine and not the Commissioner of Taxation. The payer and the payee therefore decide whether the payee is an employee or a contractor.

Factors in deciding the relationship

The first consideration must be the terms of the contract. At all times, the underlying consideration is whether the worker is working:

· in the service of another, as an employee, or

· on their own behalf, as an independent contractor.

Taxation Ruling TR 2005/16 Income tax Pay As You Go withholding from payments to employees, provides guidance to the types of factors to be considered in each case. The features discussed below, have traditionally been regarded by the courts as indicators to assist in determining the true nature of the contract.

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. 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.

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. In fact, a high degree of direction and control is not uncommon in contracts for services. The payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract otherwise the contractor is free to exercise his or her discretion (subject to any terms implied by law). This is because the contractor is working for himself or herself.

Under a contract of service, on the other hand, the employee has an implied right within the limits imposed by industrial relation laws, to direct and control the work of an employee. This is because the employee is working in the employer's business and the own of a business has the right (within the confines of applicable law) to manage that business as the owner sees fit.

The courts stated that what matters is lawful authority to command, so far as there is scope for it.

The more control that is held over the person performing the work, the more likely it is that the person will be an employee.

In this arrangement, the students' needs are assessed and Company A assigns a suitable educator who is willing to work with the student. The educators are then instructed where to go for the work, ie. the student's home or other designated area. There is no contractual obligation for the educators to take on new students and they may decline the offer of work. However, once a student is accepted, the educator must provide the service for the entire specified period. The educator is able to conduct sessions in the manner he or she sees fit.

These factors demonstrate that the educators have a high degree of control and discretion over when and how they work and indicate that it is more a contract for service.

Results test

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 and not employment.

Under 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 this arrangement the educators provide the service to designated students within their homes. The educators are paid at a set per session or as agreed, after submission of an invoice to Company A. This would suggest that the payment is for a specified outcome or result and indicate a contract for service, that is, an independent contractor.

Delegation of work

The power to delegate or subcontract (in the sense of the capacity to engage others to do the work) is a significant factor in deciding whether a worker is an employee or independent contractor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor.

In this arrangement, the educators cannot delegate their work to others and are contractually required to personally perform the work. The factor would indicate that it is more a contract of service.

Business risk and expenses

Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are 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.

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 arrangement, the educator provides their own resources and it is expected that they have the use of a car. There is no indication that the educators will be reimbursed for such expenses. Further, the educators also sign a contract which states they will be responsible for their own tax, superannuation and insurance obligations.

These factors are more indicative of the arrangement constituting an independent contracting arrangement.

Other

In addition to the above indicators, there are some more which are more suggestive of an employer-employee relationship. They 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 and the provision of other benefits prescribed under an award for employees.

However, the fact that a contract does not contain provisions for annual and sick leave will not, in itself, be an indicator of a principal/independent contractor relationship.

Conclusion

With consideration of the facts you have provided in your application for a private binding ruling, and reference to the indicators provided in TR 2005/16 it is considered that the educators hired by Company A are engaged as independent contractors rather than employees.

This means that Company A would not be required to withhold from the payments made to the educators under section 12-35 of Schedule 1 to the TAA.