Edited version of your private ruling

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Subject: employee v contractor

Question

Is a person considered an independent contractor or an employee?

Answer

Independent Contractor

This ruling applies for the following periods:

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2003

Relevant facts and circumstances

The person was first engaged by the payer on a trial basis.

On initial engagement the payer and the person entered into a contractual agreement.

The agreement outlined specific tasks to be performed by the person.

The agreement stated:

· the person is to undertake the above tasks independently. but in conjunction with the CEO to ensure deadlines are met.

· an amount would be paid to the person on a per hour basis for work completed within the nominal amount of hours per month. The amount to be paid includes allowance for on-costs such as superannuation and personal accident insurance.

· The payer will pay at cost, all reasonable expenses such as travel, postage, telephone calls and a proportion of telephone rental and power

· The person may present invoices at intervals deemed appropriate but in each case, the invoice must refer to work completed and the time spent according to logged hours referred to as part of the evidential records above

· Any variation to the fees allowed for the project must be sought and justified in writing and agreed by both parties to the agreement.

· The person agrees not to subcontract performance of any part of the Contract Services without prior approval of the payer

· The payer may impose any terms and conditions it considers appropriate when giving its approval to sub-contract including requirements for any sub-contractor to provide evidence of sufficient insurance and a deed on non-disclosure prior to taking up any work under the respective sub-contract

· The person agrees, for so long as any obligations remain in connection with this agreement to effect and maintain personal accident insurance as required by law, acceptable to the payer, for all the person's obligations under this agreement, including those that survive the expiration or termination of this agreement.

· Either the person or the payer may, at any time by notice, terminate this agreement.

· Upon receipt of a notice of termination the person agrees to:

1. stop work as specified in the notice

2. take all available steps to minimise loss resulting from that termination and to protect Contract materiel; and

3. continue work on any part of the Contract Services not affected by this notice.

· The person cannot assign their obligations and agrees not to assign their rights under this agreement without in either case, obtaining prior approval in writing from the payer.

The person has worked continuously for the payer since early 2004.

The person undertakes the bulk of their work from their home and is not restricted to working certain days or times as long as they completes the requested items by their due dates.

From the payer's point of view, the person has always been viewed as an independent contractor. They have had to pay their own superannuation, tax and insurances and they have set up a monthly direct debit for their superannuation.

The person is responsible for their own working equipment such as stationery, telephone and computer.

In addition to being engaged by the payer, the person had other engagements under their own ABN and as an employee.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

A determination of whether an individual under a specific arrangement is an employee must be made by a consideration of the total factual circumstances in light of all of the indicators determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16 considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

These indicators include:

· The control test: The degree of control which the payer can exercise over the payee.

· The organisation or integration test: Whether the worker operates on their own account or in the business of the payer.

· The results test: Whether the worker is free to employ their own means and is paid to achieve the contractually specified outcome.

· The delegation test: Whether the work can be delegated or subcontracted (with or without the approval or consent of the principal).

· The risk test: Whether the worker bears the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

· Which party provides tools, equipment and payment of business expenses?

Control

The test for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done. The importance of control lays not so much in its actual exercise as in the right of the employer to exercise it.

A high degree of discretion or latitude in the manner in which a task is performed does not, of itself, indicate a contract for services.

Further, although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment relationship. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements any control or direction must be expressed in terms of the contract only, so that outside the contractor is free to exercise their own discretion, because they work for themselves.

In your case, the only right of control that the payer exerts over the person is that specified tasks be completed by certain due dates, this restriction is consistent with any contractor being given a set of tasks to complete within a certain time period. The person is not specifically told how to perform the allotted tasks as they have the requisite qualifications to perform the specific tasks. The person works independently on the above tasks but in conjunction with the CEO who they also directly reports to. The payer undertakes the bulk of their work from their home and is not restricted to working certain days or times as long as they complete the requested tasks by their due dates.

Organisation or integration

In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payers business but the work is not integrated into the business rather is an accessory to it.

In this case, the person has been engaged and has worked continuously for the payer since early 2004. The person is given a set of general tasks to complete within a certain time frame. They have a high level of discretion and flexibility in how those tasks are completed. The person also works as an independent contractor for another organisation under her own ABN.

Results

Where the substance of a contract is for the production of a given result, there is a strong indication that the contract is one for services.

'The production of a given result' means 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. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

In this case, the person is free to sub-contract, with the approval of the payer, the tasks they are contracted via the agreement to complete provided the sub-contractor has the appropriate level of personal accident insurance. The tasks outlined in the agreement must be completed by the appropriate due dates. The person is contracted to achieve certain results within allotted time frames. These tasks occur on a set period basis, however the tasks occur continuously.

Delegation

The power to delegate or subcontract 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.

Whereas if an individual has unfettered power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. The contractor is free to arrange for their employees to perform all or some of the work or may subcontract all or some of the work to another service provider. In these circumstances, the contractor is the party responsible for remunerating the replacement worker.

A common law employee may frequently 'delegate' tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this 'delegation' exercised by an employee is fundamentally different to the delegation exercised by a contractor outlined above. When an employee asks a colleague to take an additional shift or responsibility, the employee is not responsible for paying that replacement worker, rather the workers have merely organised a substitution or shared the work load. This is not delegation consistent with that exercised by a contractor.

The person agreed not to subcontract performance of any part of the contract services without prior approval of the payer. In granting approval the payer may impose any terms and conditions it considers appropriate including requirements for any sub-contractor to provide evidence of sufficient insurance and a deed of non-disclosure prior to taking up any work under the respective sub-contract.

Risk

An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies.

Whether the worker is contractually obliged to accept liability 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 bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense.

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

The person receives a set amount per hour for the services they provide. Included in that amount is an allowance for on-costs such as superannuation and personal accident insurance. The person provides for their own personal accident insurance. The risk arising out of injury whilst working for the payer is borne wholly by the person. The person also arranges to pay tax on the income they receive and also provides for their own superannuation.

Provision of tools and equipment and payment of business 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.

However, the provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor.

There are situations where very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work.

Further, 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.

As stated in the contract, the person is responsible for their own working equipment such as stationery, telephone and computer. The payer will however, reimburse the person for all reasonable expenses such as travel, postage, telephone calls and a proportion of telephone rental and power.

Conclusion

There are factors to a minor degree which point toward the person being an employee and others which suggest they are an independent contractor.

After considering all the facts presented and with reference to the indicators provided in TR 2005/16, it is considered that the person works as an independent contractor.