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Ruling

Subject: Employee vs Contractor

Question 1

Are the workers hired by Company X considered to be employees or contractors?

Answer

Contractors

Question 2

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

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on::

1 July 2009

Relevant facts and circumstances

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:

· A private ruling application received in July 2011.

· A copy of the contract between Company X and the workers.

You have a business and employ workers to assist with the overload.

The workers work a maximum of 5 hours per week and set their own time and hours.

The workers have their own ABNs and sub contract to you on an as-needs basis.

The workers invoice you under their business name and ABN.

You invoice your clients under your ABN and business name and then pay the workers.

The workers can delegate the work to others or pay another person to carry out the work.

The payment to the workers is primarily decided by you however some workers will negotiate a payment which can usually be agreed upon.

The workers are paid an hourly rate.

The workers are not provided with any provisions of benefits.

Any equipment or tools required to complete the work must be provided by the workers.

The workers are liable for the cost of rectifying any defect in the work performed.

The workers sign a sub contractor agreement. This agreement contains the following conditions of engagement:

· Company X will pay the worker after they receive payment from the client and upon receipt of an invoice from the worker.

· The worker understands that they are independent sub contractors and not employees of Company X. Company X will not provide for any benefits including superannuation, taxes, workers compensation etc.

· The worker is responsible for all necessary insurance in respect of all liabilities.

· The worker is responsible for providing all tools and equipment.

· The worker will not canvass any client of Company X for a minimum of 2 years without paying Company X a sum for recompense.

Relevant legislative provisions

Taxation Administration Act 1953 Section Schedule 1-12-35.

Reasons for decision

Requirement to withhold for Pay As You Go Withholding (PAYGW)

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

An 'entity' is defined under section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean an individual, body corporate, body politic, partnership, any other unincorporated association or body of persons, a trust and a superannuation fund.

Where section 12-35 of Schedule 1 to the TAA refers to an employee, the reference is to an employee at common law.

Employee Vs Independent Contractor

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. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services.

A determination of whether an individual under a specific arrangement is an employee cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of that individual. It is the totality of the relationship that needs to be considered. 

Taxation Ruling TR 2005/16 Income tax Pay As You Go withholding from payments to employees at paragraph 7 states:

'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 has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

1. Terms and circumstances of contract - a clause in a contract that purports to characterise the relationship between the parties as that of principal/independent contractor and not that of employer/employee must be considered with all the other terms of the contract. That is, the parties cannot deem the relationship between themselves to be something that it is not by simply giving it a different label.

2. Control test - the degree of control which a person who engages another person can exercise over that person is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. A common law employee is told not only what work is to be done, but how and where it is to be done. However, the mere fact that a contract may specify how the contracted services are to be performed does not necessarily imply an employment relationship.

3. Contract for results - 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. Other indicators of a contract for services include where the person is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome, the consideration is for a fixed sum on completion of the specified services which is the result, as opposed to an amount paid by reference to hours worked. 

4. Delegation - if a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result.

5. Risk - where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more 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. 

6. Provision of tools/payment of own expenses - 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. Further, the Tax Office considers that an employee, unlike an independent contractor, 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.

7. Other - other indicia suggesting an employer-employee relationship 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;

· provision of other benefits prescribed under an award for employees; or

· a requirement that a worker wear a company uniform.

Application to your circumstances

In your case, you run a business and you sub-contract to assist with the overload of work. You advise that there is a sub-contractor agreement between you and the workers.

Upon review of this contract, the Commissioner has identified several indicators that the workers are engaged as independent contractors. The contract defines the agreement as a 'sub-contractor agreement' and not as employees of Company X. The workers are responsible for providing all tools and equipment. The workers receive payments for work performed after provision of a tax invoice and are free to perform services for others during the term of the agreement.

While there are also some indicators that point towards an employee relationship such as the workers being paid at an hourly rate by company X and not directly by the client, on balance, the Commissioner considers the arrangement to be that of an independent contractor.

With respect to the control test, you advise that workers cat set the time and hours they work and are free to delegate the work or pay another person to carry out the work. This demonstrates that the workers have discretion over when they work, how they work and where the work is carried out. These entitlements are indicative of their status as independent contractors rather than employees.

The contract for results is less conclusive. The workers receive payments from company X through the provision of tax invoices, but only after Company X have received payment from the client. Further, they are paid a set rate per hour, rather than payment to produce an actual result. This factor is inconsistent with the workers being regarded as contractors.

While the contract for results test is inconclusive, the delegation and risk tests produce a more specific outcome. You have advised that the workers are free to delegate the work to others or pay another person to carry out the work. You also advise that the workers are liable for the cost of rectifying any defects in the work they perform. Further, the contract specifies that the workers will have all necessary insurances in place in respect of all liabilities. These factors indicate that the workers are independent contractors.

Regarding the provision of tools and payment of expenses, the contract specifically provides that the worker is responsible for providing all tools and equipment to perform the work. This is indicative of a contractor relationship.

Lastly, the contract specifies that Company X will not provide any benefits, including superannuation, workers compensation, taxes etc.

Whilst this factor, in itself, is not indicative of an independent contractor relationship, having regard to the all of the factors listed above, it is the Commissioner's view that on balance, the workers are independent contractors, rather than employees.

As such, Company X does not have an obligation to withhold tax on the payments made to the workers pursuant to sections 12-35 and 16-15 of Schedule 1 to the TAA.