Edited version of administratively binding advice

Authorisation Number: 1011765432427

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Advice

Subject: Employee v independent contractor

Question

Is the worker an employee or an independent contractor for the purposes of the Superannuation Guarantee (Administration) Act 1992?.

Answer

Yes, the worker is considered to be an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992. See reasons for decision.

This ruling applies for the following periods:

Quarter ended 31 March 2011

Quarter ended 30 June 2011

The scheme commences on:

During the financial year ended 30 June 2011

Relevant facts and circumstances

This advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on Tax Office advice.

Your advice is based on the following facts.

· The worker started working for the organisation as head coach during 200X.

· In the recent year, the ATO sent a letter to you requesting a completed Superannuation Guarantee: Status of the worker questionnaire (Principal/Payer).

· You returned a completed Superannuation Guarantee: Status of the worker questionnaire (Principal/Payer) to the ATO.

· The ATO sent an email requesting further information to help determine if the worker was an employee or independent contractor of the organisation.

· You sent a reply to the ATO providing further information as requested.

· ATO also received an email from the worker providing further information as requested.

2011 Agreement provides the following information:

In the recent year an Agreement was entered into between the organisation and the worker setting out the terms and conditions for the worker to coach the Team as follows:

· The worker to coach the Team for a period of 12 weeks commencing in the particular month.

· The agreement may be terminated by either party by giving 60 days written notice to the other party.

· The worker to coach the Team two to three times per week to a maximum of 10 hours per week.

· The worker to coach the Team to a level that will enable them to compete at State, National and World competitions.

· The worker to formulate a training schedule.

· The worker to provide a training schedule for approval.

· The worker to supervise the assistant coaches.

· The worker to liaise with parents of team members as required.

· The worker to liaise with the Management Committee of the organisation as required.

· The worker to be paid $XX per hour plus be reimbursed for reasonable out of pocket expenses as approved by the Treasurer.

· The worker to be paid on a monthly basis by cheque upon provision of an invoice containing an ABN.

Superannuation Guarantee: Status of the worker questionnaire (Principal/Payer) provides the following information:

· The worker to coach the Team and organise tours and demonstrations.

· The organisation requested and paid for the worker to undertake a certain Coaching Course.

· The organisation requires the worker to wear the team uniform at all public performances and competitions.

· The worker is not entitled to annual leave and sick leave.

· The worker is not entitled to superannuation.

· The worker is entitled to reimbursement for out of pocket expenses.

· The worker is negotiating for reimbursement for future travel expenses associated with interstate and overseas travel. The worker is yet to incur such travel expenses in her tenure with the organisation.

· The worker is expected to perform her coaching duties personally and cannot delegate or subcontract her role. If the worker cannot make a training session for any reason that training session will be cancelled.

· The organisation provides a training facility, circuit training and gymnastics equipment, electronic pace clock, mobile PA system, CDs and DVDs, heart rate monitors and skipping ropes. They are in the process of buying a computer.

· The worker provides a computer and some CDs.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992

Subsection 12(1)

Subsection 12(3)

Reasons for decision

Summary

The worker is considered to be an employee of the organisation for the purposes of the SGAA as the worker meets the common law definition of employee and the extended definition of employee in subsection 12(3) of the SGAA. Accordingly, the organisation has an obligation under the SGAA to pay superannuation support on behalf of the worker.

Detailed reasoning

The SGAA states that an employer must provide the required minimum level of superannuation support for its employees (unless the employees are exempt employees) or pay the superannuation guarantee charge (SGC).

Subsection 12(1) of the SGAA defines the term 'employee' as having its ordinary meaning - that is, its meaning under common law. If a worker is held to be an employee at common law, then they will be an employee under the SGAA (unless one of the limited exceptions in subsections 12(9A) and (11) apply).

Subsection 12(3) of the SGAA expands the ordinary meaning of the term 'employee' to include people who are contracted wholly or principally for their labour.

It is 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, and whether the extended definition of employee in subsection 12(3) of the SGAA applies.

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the independent contractor/principal relationship that, at law, is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

Generally, if the person is considered to be an independent contractor, then there is no common law employment relationship. However, subsection 12(3) of the SGAA extends the common law meaning of employee for the purposes of that statute, to include a person engaged under a contract that is wholly or principally for the person's labour. This means that a contractor can be an employee under the SGAA.

Accordingly it is necessary to determine the true nature of the relationship between the organisation and the worker, as to whether there was a common law employer/employee relationship, or whether the worker meets the extended definition of employee under subsection 12(3) of the SGAA.

Factors we consider when deciding whether workers are common law employees

In coming to our decision we have taken into consideration Superannuation Guarantee Ruling SGR 2005/1. This ruling explains when an individual is considered to be an 'employee' under section 12 of the SGAA, and lists key indicators of whether an individual is an employee or independent contractor at common law.

How courts define a common law employee

The courts have developed a method for applying the ordinary, or common law meaning of an employee. Their approach is to look at a wide range of factors that indicate whether a person is an employee.

For example, if the employer provides the place of work, this might indicate an employment relationship, while the absence of holiday pay might suggest the opposite. The courts' decisions tend to take a balanced approach, after considering the relevant factors.

The common law meaning of the term 'employee' was stated by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16. It is clear from that case that there is no single objective test which will give the answer:

... it is the totality of the relationship between the parties which must be considered ..., and

... the question is one of degree for which there is no exclusive measure...

Therefore it is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is working in the service of another (as an employee) or is working on their own behalf (as an independent contractor).

Importantly though a clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract.

Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole. That is, the parties cannot deem the relationship between themselves to be something that is not. Though the terms of the contract need to be examined the subsequent conduct of the parties may demonstrate that the relationship has a character contrary to the terms of the contract.

Terms of engagement

The terms and conditions of a contract will always be of considerable importance to the proper characterisation of the relationship between the parties.

It might be argued that the parties' intention in forming a contract is not subjective, but an objective one; that is, the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Isaacs J in Curtis v. The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17:

Where parties enter into a bargain with one another whereby certain rights and obligations are created, they cannot by a mere consensual label alter the inherent character of the relations they have actually called into existence. Many cases have arisen where Courts have disregarded such labels, because in law they were wrong, and have looked beneath them to the real substance.

Therefore, simply defining someone as a contractor does not necessarily lead to the conclusion that the individual is providing services as part of an operation of their own independent business.

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.

Application of the law to the facts provided

The organisation established a working relationship with the worker during 200X by word of mouth.

In the recent year an Agreement was entered into between the organisation and the worker setting out the terms and conditions for the worker to coach the Team as follows:

· The worker to coach the Team for a period of 12 weeks commencing on the particular date..

· The Agreement may be terminated by either party by giving 60 days written notice to the other party.

· The worker to coach the Team two to three times per week to a maximum of 10 hours.

· The worker to coach the Team to a level that will enable them to compete at State, National and World competitions.

· The worker to formulate a training schedule.

· The worker to provide a training schedule for approval.

· The worker to supervise the assistant coaches.

· The worker to liaise with parents of team members as required.

· The worker to liaise with the Management Committee of the organisation as required.

· The worker to be paid $XX per hour plus be reimbursed for reasonable out of pocket expenses as approved by the Treasurer.

· The worker to be paid on a monthly basis, by cheque, upon provision of an invoice containing an ABN.

The agreement stipulates that the worker is an independent contractor and not an employee. Whether or not this accurately reflects the working relationship between the parties can only be determined after a closer look at this relationship and the examination of a number of indicators.

Control

The classic test for determining whether the relationship of employer and employee existed was the exercise of control over the manner work was performed in. 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.

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 latter's 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.

Application of the law to the facts provided

The organisation hired the worker as head coach and it is natural that the organisation will leave the worker to coach the team with minimal or no intervention. The worker coaches the team as the worker sees fit and devises a training schedule within stated parameters which is subject to approval. The worker also has flexibility as to where coaching takes place as long as it does not result in an additional cost to the organisation. In reality it would appear that the organisation provides a facility which the worker is happy to use.

Whilst the organisation exercises minimal control over the worker in the day to day coaching of the team, the agreement between the parties would seem to indicate that the organisation is not devoid of control. The agreement specifically states that the worker is to be available to the organisation to discuss coaching matters and has the ultimate power (as does the worker) to terminate the agreement. Other points to come out of the agreement include:

· The worker to provide a training schedule for approval.

· The worker to supervise the assistant coaches.

· The worker to liaise with parents of team members as required.

· The worker to liaise with the Management Committee of the organisation as required.

The organisation also paid for the worker to complete a coaching course. A level of control can be identified in this case which is not unusual in an employer and employee relationship.

Integration

A particularly significant factor in establishing the nature of the contractual relationship at common law is to determine whether the worker's services are an integral part of the employer's business (under a contract of service as an employee) or providing services as an individual carrying on their own business (under a contract for services as an independent contractor). This is otherwise known as the business or integration test.

In Montreal v. Montreal Locomotive Works 1 DLR 161, 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.

The Full Bench of the High Court in Hollis v. Vabu (2001) 207 CLR 21 (Vabu) endorsed the proposition stated by Windeyer J in Marshall v. Whittaker's Building Supply Co (1963) 109 CLR 210 that 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.

This factor was given significant prominence by the High Court as an aid to determining the common law contractual relationship between the parties to the dispute in the context of vicarious liability. In arriving at the conclusion that the bicycle courier was a common law employee of the courier company (which then became vicariously liable for the bicycle courier's negligence), Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ stated that:

Viewed as a practical matter, the bicycle couriers were not running their own business or enterprise, nor did they have independence in the conduct of their operations.

Activities or requirements of the worker that may indicate their integration into the business include:

· wearing a company uniform

· the provision of protective equipment by the principal for the worker

· an ongoing relationship between the principal and worker, and

· the worker is effectively restricted to providing services for the one principal.

Application of the law to the facts provided

The organisation states that the worker has been their coach since 200X. The organisation is open to hiring another coach if there was another coach available with comparable skills and experience but so far the worker has been the only coach. The worker is also required to supervise a number of junior coaches during the training session. The above factors illustrate that the worker is integral to the organisations existence and is indicative of employer and employee relationship.

The organisation has stated that the worker is free to offer services to other individuals. In fact, both parties agree that the worker runs their own private coaching session where the worker is paid directly by the participants. The worker states that the worker came by these jobs through word of mouth. This is often indicative of an individual carrying on their own business.

Both parties agree that the worker does wear the team uniform at public performances and at competitions. The organisation states that this is a requirement whereas the worker states that it is not a requirement but the worker chooses to do so. The fact that the worker does wear the team uniform at public performances will make it appear, to a reasonable person that they are a part of the organisation. This factor indicates that a third party would be likely to construe the parties' relationship as employer and employee.

The organisation has stated that the worker does not have any badge, clothing, business cards or other items that promotes their coaching services. The organisation also states that neither the organisation nor the worker advertise the organisation on the equipment or tools that are used. This factor indicates that the worker does not actively promote their coaching services (the worker's business) to the public.

On balance, with respect to the integration test, the above facts indicate that the worker is integrated in the organisation. This is a strong indicator of an employer and employee relationship.

Results

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. In World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327 (World Book) 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.

However, payment of a result is also consistent with employees who are paid on a commission only basis.

The High Court in Vabu did not consider that payment to the bicycle couriers per delivery, rather than per time period engaged, was inconsistent with an employment relationship.

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 dependent on, and referable to, the completion of the specified services.

'Results' contracts describe traditional principal/independent contractor arrangements where a specific identifiable task is performed. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to the hours worked.

Application of the law to the facts provided

The worker is not paid to achieve a result. The worker is paid an amount of $XX per hour to a maximum of 10.5 hours per week to render services to the organisation in the form of coaching. The worker contracts to provide labour with the organisation requiring the worker to personally perform the duties of coach and providing the environment in which to coach.

Generally where a worker is paid by reference to the hours worked, this is a clear indicator of a contract of service, typical of a principal and employee relationship. In this case, it is clear that the worker is paid according to the hours that the worker coaches. Although the worker is required to train the participants to a level that will enable them to compete in state, national and world championship competitions, the remuneration is not dependant upon the worker achieving a result or meeting an agreed upon threshold.

With respect to the results test, it is considered that the worker is engaged to work for an hourly rate, consistent with an employer and employee relationship.

Delegation

The 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.

Delegation is not simply the delegation of task from one employee to another or the ability to swap shifts or request a fellow employee to perform some duties - it is the ability to subcontract or employ others to perform the work.

Where the person is not working under a contract for services (a results based contract), any delegation exercised by that person will not be the same as the delegation exercised by a contractor who is free to subcontract all or some of the work to achieve the specified result.

Application of the law to the facts provided

Both parties agree that the worker is expected to carry out her work personally. If the worker is sick or on holidays the training sessions are cancelled.

With respect to the delegation test, this is considered to be a strong indicator of an employer and employee relationship.

Risk

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees. However a principal will not be liable for negligence or injury caused by an independent contractor.

The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit), the more they are likely to be regarded as being independent. Typically, a worker who derives piece rate payments and sustains large outgoings would be so exposed. The higher the proportion of the gross income of the worker which is required to be expended in deriving that income, and the more substantial the assets which the worker brings to the tasks, the more likely that the contract is for services, or a contract with an independent contractor.

Another consideration of risk is the liability for the cost of rectifying faulty work. That is, the key underlying consideration is whether the individual is exposed to commercial risk in terms of a liability to cover the cost of rectifying defective work. This is consistent with the focus on the chance of profit and the risk of loss as a traditional indicator that a worker is an independent contractor conducting their own business.

Application of the law to the facts provided

The organisation has stated that neither the organisation nor the worker hold any insurance policies. Both parties agree the worker is not liable to rectify any defects in the work performed. The organisation further states that they will pay for any breakages except if it was caused by wilful damage or gross negligence.

The Head Coach Agreement discusses risk when it states:

…the Coach shall not be liable to the the organisation …for any acts or omissions in the performance of services on the part of the Coach…except when said acts or omissions of the Coach are due to wilful misconduct or gross negligence.

Also, as discussed under the 'results test', the worker's remuneration is not dependant upon the worker achieving a result. Therefore, the worker is not exposed to any commercial risk as the worker gets paid by the hourly rate.

With respect to the risk test, the facts show that the worker is not exposed to any commercial risk. The worker also does not hold any business or liability insurance policy. Therefore, it is considered that the relationship is one of an employer and employee.

Other indicators

Capital - provision of tools and equipment and payment of business expenses

A worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for his work by the employer. Furthermore, the employer is often also responsible for the business expenses incurred by the worker, since the worker has been integrated into the employer's business.

Independent contractors carrying on a business for themselves often pay and provide for their own assets, tools, equipment, maintenance costs and other expenses. As stated by McKenna J in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497 at 526:

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

The investment of capital, the maintenance of capital and risk of loss of capital in the event of an unsuccessful venture must be of a significant nature to deem a worker not an employee.

Application of the law to the facts provided

The organisation provides a training facility, circuit training and gymnastics equipment, electronic pace clock, mobile PA system, CDs and DVDs, heart rate monitors and skipping ropes. They are in the process of buying a computer.

The worker provides a computer and some CDs.

The fact that the organisation provides the environment in which the worker works indicates the worker is an employee working in this environment.

If a person is reimbursed or receives an allowance for work related expense, this also is an indication that the person is an employee.

The worker is entitled to reimbursement for out of pocket expenses. The worker is also negotiating for reimbursement for any future travel expenses associated with interstate and overseas travel. The worker is yet to incur such travel expenses.

The fact that the worker is reimbursed for work related expenses indicates the worker is an employee. Therefore, it is considered that the relationship is one of an employer and employee.

Conclusion on consideration of all common law factors

After balancing the results from the above tests, it is considered that the worker is an employee of the organisation. Although there are some factors which might indicate a principal and independent contractor relationship, the overall facts and evidence suggests that this is a contract of service and that the organisation does have an obligation to provide superannuation support to the worker under the SGAA.

Although we have determined that the worker is an employee under the common law, the Commissioner will also consider whether the worker would be an employee under the extended definition in subsection 12(3) of the SGAA. This aspect has been considered and is addressed below.

Extended definition of employee under subsection 12(3) of the SGAA

The extended definition of employees under subsection 12(3) of the SGAA provides that if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

Subsection 12(3) of the SGAA requires the individual to be working wholly or principally for the labour of the person. SGR 2005/1 provides further guidance on this issue and states at paragraph 11 that:

Where the terms of the contract indicate that:

· the individual is remunerated (either wholly or principally) for their personal labour and skills;

· the individual must perform the contractual work personally (there is no right of delegation); and

· the individual is not paid to achieve a result,

the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

The individual is remunerated (either wholly or principally) for their personal labour and skills

The worker is remunerated principally for personal labour and skills and is paid on a per hour basis to coach the Team. The worker is reimbursed for out of pocket expenses such as a coaching course the worker required to undertake. The organisation requires the worker to personally perform the duties of coach and provides the environment in which the worker works.

The individual must perform the contractual work personally (there is no right of delegation)

Both parties agree that the worker is expected to carry out her work personally. If the worker was sick or on holidays the training sessions are cancelled.

With respect to the delegation test, this is considered to be a strong indicator of an employer and employee relationship.

The individual is not paid to achieve a result

An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result). A results contract will usually involve the performance of a service by one party for another where the first mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked.

The worker is not paid to achieve a result. The worker is paid an amount of $XX per hour to a maximum of 10.5 hours per week to render services to the organisation in the form of coaching. The worker contracts to provide the labour with the organisation requiring the worker to personally perform the duties of coach and providing the environment in which to coach.

Accordingly, the worker also meets the extended definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion

Upon considering all the available facts and evidence the Commissioner has concluded that the worker who is engaged by the organisation is an employee for the purposes of the SGAA under the common law definition and the extended definition provided under subsection 12(3) of the SGAA. As such, the organisation is required to provide superannuation support under the SGAA to the worker.