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Ruling

Subject: Subcontractor - contract

Question 1

Is the subcontractor who is providing cleaning services to a corporate entity an employee of that entity?

Answer

No.

Question 2

Is the subcontractor who is providing cleaning services to a corporate entity an independent subcontractor?

Answer

Yes.

Question 3

Do you have any PAYG or Superannuation obligations for the subcontractor?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Your contract states, in part;

it agrees to engage the subcontractor for the provision of services on the following terms and conditions:

· the subcontractor is engaged as an independent contractor

· the parties acknowledge that the subcontractor is solely responsible for controlling the manner in which the subcontractor provides the services

· the company will agree to pay the subcontractor the fixed lump sum amount for the tenure of one year or the tenure of the contract whichever is less or the agreed quantum (fee). The fee is exclusive of GST

· the subcontractor will invoice the company at the end of each month and the company will make payment within 14 days of receiving the invoice.

· the subcontractor agrees that payment of the fee constitutes full payment for the provision of the services.

· the subcontractor will provide the services at its own cost, and unless expressly authorised by the company, will not be entitled to be reimbursed for any out of pocket expenses incurred by the subcontractor in connection with the provision of the services and will be solely responsible for and solely bear;

· the payment to the subcontractor's employees, and agents of remuneration and benefits including salaries and wages, annual leave, sick leave, superannuation, long service leave and all other benefits to which any of them may be entitled under any contract of service or contract for service with the subcontractor or under any award, industrial instrument, statute or common law;

· the payment of all taxes and duties in respect of such remuneration and benefits; and

· the payment of all amenities, parking tickets etc.

· compliance with and costs of compliance with, all other statutory or other legal or contractual requirements with respect to the contractor's engagement under this agreement.

· the payment of their own insurance

· the subcontractor or the company may terminate the engagement of the contractor and this agreement at any time for any reason by giving the other party one month's notice in writing.

· the company may terminate this agreement at any time without notice if the subcontractor engages in a serious or material breach of this agreement.

· the subcontractor's duties will involve all the service delivery duties and responsibilities agreed upon by the subcontractor while entering into this contract.

· the subcontractor will complete the tasks specified by the company from time to time within the time frames agreed upon and to the standard specified by the company.

· the subcontractor must ensure that the provision of services to or for any other person or entity by the subcontractor does not interfere with the provision of the services to the company in the manner required by this agreement.

· the company may nominate its employee or any third party agency to inspect the quality of work performed by the subcontractor from time to time.

· the subcontractor acknowledges and accepts that they are required to provide proper and adequate insurances as may be prescribed or required by the laws of the lands in which their employees work and reside and indemnifies the company of any requirement or responsibility to insure or co-insure.

· The subcontractor is required to name the corporate entity as principal on all relevant insurance policies carried by the subcontractor. This includes Workers Compensation and Public and Products Liability Policies.

· the subcontractor is responsible for the provision of Workers Compensation Insurance to cover the subcontractor's employees and working directors and indemnifies the corporate entity in respect of all/any requirement or responsibility in respect of regulatory and/or statutory requirements.

· the subcontractor must ensure all its employees, officers and agents are insured under a comprehensive motor vehicle policy to drive all and any motor vehicles used in the performance of their services and work.

· the corporate entity takes no responsibility for loss of plant, equipment or stock belonging to the subcontractor

· subcontractors are not covered under the corporate entity insurance

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1

Superannuation Guarantee (Administration) Act 1992 section 12

Reasons for decision

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 paragraph 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 has provided the following 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.

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.'

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.'

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.

TR 2005/16 paragraph 37 provides:

In contracts to produce a result, payment is often made for a negotiated contract price, as opposed to an hourly rate. For example, in Stevens v. Brodribb, payment was determined by reference to the volume of timber delivered, and in Queensland Stations where it was a fixed sum per head of cattle delivered.

TR 2005/16 paragraph 38 further provides:

Having regard to the true essence of the contract, the manner in which the payment is structured will not of itself exclude genuine result based contracts. For example, there are results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task, or may even be calculated on that basis, subject to reasonable completion times.

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.

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.

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.

PAYG and Superannuation

The subcontractor is not paid as an employee for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953.

The subcontractor is not an employee for the purposes of section 12 of the Superannuation Guarantee (Administration) Act 1992.

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 subcontractor will be engaged by the corporate entity as an independent contractor and not as an employee of the corporate entity.

You have no obligation for PAYG or Superannuation in relation to the subcontractor.