Edited version of administratively binding advice

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Advice

Subject: Administrative binding advice: Superannuation guarantee

Question 1

Was the Worker engaged by the Principal, an employee or independent contractor for the purposes of section 12 of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period 1 April 2005 to 17 October 2011?

Advice

Based on the provided information, the Worker is considered to be an independent contractor. Accordingly the Principal does not have an obligation under the SGAA to make superannuation guarantee payments on behalf of The Worker.

Question 2

Was The Worker your employee by virtue of subsection 12(3) of the SGAA?

Advice

Based on the provided information, The Worker was not your employee by virtue of subsection 12(3) of the SGAA.

This advice applies for the following period:

1 April 2005 - 17 October 2011

Relevant facts and circumstances

Your 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 ATO advice.

The Commissioner received a request for advice from the Principal with respect to superannuation guarantee and a worker engaged by them. The request included the following information:

· The Principal is engaged in a business.

· The Principal has a number of crews working throughout the state at any one time.

· The Worker was engaged to quote jobs and to supervise staff of the Principal. This required him to regularly travel to sites and he provided his own vehicle and charged for its use.

· The Worker has ceased to contract to the Principal and has requested that SGC be paid on his invoices.

· The Principal requests a ruling as to whether they are liable for SGC and if so on what portion of the invoice.

· The Principal does not believe they are liable for SGC on any portion of the payment.

However, if they are deemed to be liable then should only be liable on the labour component. You believe that the vehicle component and expense component are in the nature of payment of expenses and should not be included in the SGC calculation.

You provided a copy of an invoice from the Worker headed Management Services for Labour, Vehicle and Expenses.

It was advised that we would require a Principal/Payer questionnaire to be completed and confirmed with your office would forward a Worker/Payee questionnaire to the Worker to ensure that there was no breach of your client's privacy.

We wrote to you acknowledging your application and requested the completion of the Principal / Payer questionnaire and that you forward the Worker / Payee questionnaire to the Worker.

We received your completed Principal / Payer questionnaire and a covering letter advising that you were not in a position to forward the questionnaire directly to the payee. The information provided in the questionnaire is summarised below:

· The Worker commenced work with the Principal in 200X and ceased work in late 20XX.

· The Worker was engaged to complete duties.

· The daily routine varied from day to day but included:

· Check / inspect (onsite or by work orders) work completed the previous day by crew

· Schedule work for the coming day

· Discuss work performance with crews

· Liaise and meet with principals

· Inspect, quote new work (onsite) or internet

· Inspect equipment

· Meet and talk to suppliers onsite

· Occasionally deliver and pick up materials

· For a period of approximately 12 months, work on install running a crew

· Train new staff in field

· Regularly worked in city and country areas.

· Work with the Principal was secured by word of mouth.

· There is no written agreement between the Worker and the Principal.

· There were a number of prior discussions with the general manager before work commenced. An annual fee was negotiated before the Worker commenced (verbal contract). No probationary period applied. Either party could terminate the agreement.

· The Worker raised his own invoices.

· The Worker was able to negotiate his rate of pay or terms and conditions. Their costs changed and the Worker requested an increase which was agreed to.

· The Principal had the right to dismiss or terminate the services of the Worker. It was agreed that either party could terminate without notice through poor performance or dissatisfaction. The Worker terminated with 3 days notice.

· No other workers were engaged on the same or a similar basis as the Worker.

· The Principal did not provide the Worker with any training as the Worker already had industry experience in supervising, quoting and inspecting.

· There were no set hours. The Worker had to perform a task in whatever days and whatever hours were required.

· The Worker was required to attend meetings within your business and with clients.

· The Worker was not entitled to paid breaks.

· The Principal did not schedule jobs or tasks to be carried out by the Worker.

· The Principal did not direct where the jobs or tasks were to be performed, however the Worker had to schedule workers and meet with staff at the Principal's premises.

· The Worker was not supervised other than by liaising with management on a regular basis.

· The Worker could refuse to do a particular job or task. The Worker did not wish to work nights and rarely did so. The Worker did not wish to start early and wanted to drop his children at school. The Worker did not wish to work on a certain piece of equipment.

· If the Worker wanted to take time off he was not required to seek the Principal's permission but was required to provide the Principal with prior notice. In this case the Worker's tasks had to be handled by a third party.

· The Worker could provide their services to other individuals or businesses, however the Principal had more work than he could do.

· The Worker worked as part of a team.

· The Worker did train, supervise and assess the work of other employees / workers of the Principal.

· The Worker was not required to wear or use a name badge or uniform. He had a business card with the Principal's logo.

· The Worker did not have his own name badge, uniform or business card or any other items promoting his business.

· The Principal did not advertise their business on any of the assets / equipment / tools used by the Worker.

· The Worker did not advertise his business on any of the assets / equipment / tools he used.

· The Worker submitted invoices to the Principal. Copies of 17 invoices have been provided showing accounts payable for Management Services. A selection of three invoices showed Labour, Vehicle and Expenses.

· The rate of pay was negotiated between the Principal and the Worker and was able to be renegotiated.

· The Worker's payment was dependent on the completion of the task / job.

· The Principal did complete checks to confirm that the Worker had completed his work before paying him. If job allocation, quoting or supervision was not carried out it would become immediately evident.

· The Worker was paid on a fortnightly basis, directly into his nominated bank account. Employees of the Principal are paid on a weekly basis.

The Worker received payment / reimbursement of the following:

· Car allowance

· Payment of expenses such as petrol, tools, materials, stationery, phone etc

The Principal did not deduct any amounts for income tax, superannuation or any other deduction from the Worker's payments.

The Principal did not give specific instructions about whether the Worker was to complete his work personally but expected the Worker to do the work because of his skills.

If the Worker was absent due to illness or on holidays the General Manager arranged for his work to be done whilst he was absent.

The Worker could not organise for his work or tasks to be completed by an employee of the Principal's business or another person engaged by the Worker. If the Worker was away his work was either delayed where possible until his return, or essential matters handled by the Principal's staff.

In relation to work performed by the Worker, neither the Principal or the Worker were responsible for paying workers compensation insurance, private accident insurance, public liability insurance or any other type of insurance. No claims have ever been made.

The Worker was not required to guarantee his work for any period of time.

The Principal did not supply the Worker with any assets, equipment or tools to complete his work. He provided his own vehicle and telephone and covered all costs. The Principal provided a desktop computer linked to a group server.

The Principal did reimburse the Worker for his assets, equipment and tools. The invoices provided indicate that the Worker was paid for vehicle and other expenses.

The Principal has advised that neither they nor the Worker provided materials for the job or arranged for delivery. However, they have advised elsewhere in the questionnaire that the Worker would occasionally be required to pick up and deliver materials.

We wrote to the Worker requesting they complete the Worker / Payee questionnaire.

The information provided by the Worker is summarised below:

· Scheduling work

· Invoicing

· Team meetings

· Liaising with clients

· Quotations

· Productivity and other reports

Work with the Principal was secured by word of mouth and the Worker was offered the position by the General Manager.

There is no written agreement between the Principal and the Worker

The Worker supplied his ABN and invoices were provided. The position was full time and the Worker attended work 5 days per week and weekends if required. The Worker was on call 24 hours per day, 7 days per week.

The Worker was able to renegotiate his rate of pay and 3 rate increases were negotiated.

The Principal had the right to dismiss or terminate the Worker's services at anytime.

The Worker did not complete any training with the Principal. Specification manuals were provided by the employer. .

The Worker generally worked from 9.00am to 6.30pm or after hours if called during the night.

The Worker was required to attend weekly meetings with the Principal and any meetings which were requested by Clients that required his attendance.

The Worker was entitled to paid lunch breaks.

The Principal scheduled the jobs and tasks of the Worker and he had a set of tasks that were to be completed on a daily basis.

The Principal directed the Worker where the jobs and tasks were to be performed and all work was completed at the Principal's office or was completed on site.

The Worker was supervised by the Principal. The General Manager supervised the Worker and would ask during the day if the Worker had prepared the relevant shift forms and productivity reports.

The Worker could not refuse to do a particular job.

If the Worker wanted to take time off he was required to get the permission of the Principal and to provide prior notice. Notice of leave needed to be pre-approved by the General Manager approximately four weeks in advance.

During the period the Worker was working for the Principal he did not advertise his services.

The Worker could not provide his services to other individuals or businesses independently of the Principal.

The Worker worked as part of an office/management team.

The Worker did not train, supervise or assess the work of other employees or workers of the Principal.

The Worker was provided with business cards by the Principal which were for the Worker to provide to clients which identified the Principal and the Worker and described his position as Production Manager.

The Principal did not advertise their business on any of the assets, equipment or tools used by the Worker.

The Worker did not advertise his business on any of the assets, equipment or tools used by the Worker.

The Worker submitted invoices to the Principal.

The Worker does not indicate if he negotiated his own fees for the work or tasks done or if he was paid based on the rates set by the Principal. The Worker received a pay rise when he requested.

The payment to the Worker was not dependent on the completion of the task or job.

The Worker was paid directly into his bank account.

The Worker received payment or reimbursement for car allowance and for payment of expenses such as petrol, tools, materials etc. The Worker's invoices were broken down into the following categories at the request of the Principal:

· Labour

· Vehicle

· Expenses

The Principal did not give the Worker specific instructions about whether the Worker was required to complete the work personally.

If the Worker was sick or went on holidays he arranged for the work to be done while he was away. The Worker would have to plan and prepare the work for the period of absence and the General Manager would see that it was done.

The Worker could organise for the work or tasks to be completed by an employee of the Principal but could not organise for the work to be completed by another person engaged by the Worker. If the Worker was organising for the work to be completed by an employee of the Principal, he would liaise with the General Manager the work that was required.

In relation to work performed by the Worker, the Principal was responsible for paying workers compensation insurance, private accident insurance and public liability insurance.

Neither the Principal nor the Worker ever made a claim against any of the above policies.

The Worker was not required to guarantee his work for any period of time.

The Worker provided his own car and mobile phone

The Worker was reimbursed by the Principal for his assets, equipment and tools. Vehicle and Expense allowances were included on the invoices.

The Principal supplied the materials for a job.

The Worker arranged for delivery of materials to a job. The Worker would arrange for the jobs to be done and the employees of the Principal would do the jobs.

The Worker was not required to wear protective work gear.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 Subsection 12(1) and

Superannuation Guarantee Administration Act 1992 Subsection 12(3).

Reasons for decision

Summary

The facts and evidence determine that the Worker was not your employee for the purposes of the SGAA under either the common law definition or the expanded definition as set out in subsection 12(3) of the SGAA and therefore you did not have an obligation to pay superannuation contributions 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 SGC.

While the term 'employee' which is defined in section 12 of the SGAA, includes common law employees, it also extends to include workers who are engaged under a contract wholly or principally for their labour. This employment relationship is often referred to as a 'contract of service'. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? from a 'contract for service which is typically a contractor and principal type of relationship and does not attract an SGC liability.

Therefore, 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 test is not met or is inconclusive, whether the expanded definition of 'employee' in subsection 12(3) of the SGAA applies. If a worker is not an employee under subsections 12(1) or 12(3) of the SGAA, their status is described as an independent contractor and there is no SG obligation.

The task of defining the characteristics of the contract of service - the employment relationship - has been the subject of much judicial consideration. As a result, some general tests have been developed by the courts to assist in the determination of the nature of the relationship. However, defining the contractual relationship between the employer and employee can be difficult and will depend on the facts of each case.

Accordingly it is necessary to determine the true nature of the whole relationship between the principal and the workers, as to whether there was a common law employer and employee relationship, or whether the workers meet the expanded definition of employee under subsection 12(3) of the SGAA.

Question 1

Was the Worker your common law employee as defined in subsection 12(1) of the SGAA for the period?

Common law employee

The relationship between an employer and 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 relationship that is referred to as a contract for services. An independent contractor typically contracts to produce the contracted result in return for an agreed payment, whereas an employee contracts to provide their labour (typically 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. As a result, a substantial and well-established body of case law has developed on the issue. Consideration should be given to the various indicators identified in judicial decisions. No list of factors is to be regarded as exhaustive and the weight to be given to particular facts will vary according to the circumstances. The totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or independent contractor.

In deciding whether an individual is a common law employee, there are a number of common law factors to consider. The common law factors we have considered are discussed below.

1. Terms of engagement

The fundamental task with respect to the terms of engagement test is to determine the nature of the contract between the parties. For this test, we must determine the nature of the contract between the parties. We will consider whether the contract is written or verbal and whether the terms and conditions are express or implied. These factors are important in characterising 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. In Hollis v. Vabu Pty Ltd (2001) 207 CLR 21 (Hollis v. Vabu Pty Ltd) it was noted that although no payments of annual leave or sick leave were given, and no superannuation deductions were made by Vabu in respect of the bicycle couriers, the relationship between the parties was found not merely from these contractual terms. The system which was operated under and the work practices imposed by Vabu went to establishing 'the totality of the relationship' between the parties and it is this which is to be considered

Application of the common law to your case:

The relationship with the Worker was established by word of mouth. There were a number of discussions held between the Worker and the General Manager of the Principal before work commenced.

The Principal has advised that the Worker was engaged as a contractor and there were never any discussions about employment. The Worker was engaged on a verbal contract and an annual fee was negotiated prior to commencement.

There was no probationary period and either party could terminate the contract for poor performance or dissatisfaction. The Worker raised invoices for payment and provided his ABN. The invoices included an amount for GST which provides an indication that the Worker was conducting a business.

The Worker was able to renegotiate his rate of pay and as his costs changed he requested an increase which was agreed to.

No other workers were engaged on the same or a similar basis to this Worker.

Overall, we are satisfied that the terms of engagement test in isolation is more in favour of the notion that the relationship between you and the Worker was one of principal and independent contractor.

2. Control

The extent to which the employer has the right to control the manner in which the work is performed is the classic test for determining the nature of a working relationship. A common law employee is told not only what work is to be done, but how and where it is to be done. With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it.

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. A high degree of direction and control is common in contracts for services because the payer has the right to specify in the contract how the services are to be performed. Similarly, the right to supervise how the work is to be performed does not constitute a contract of service where the essence is one of independent contractor.

Paragraphs 36 and 37 of SGR 2005/1 provide that while control is important, it is not the sole indicator of whether or not a relationship is one of employment. The approach of the Courts has been to regard it as one of a number of indicia which must be considered in determination of that question.

Even though the modern approach to defining the contractual relationship is to have regard to the totality of the relationship between the parties, control is still an important factor to be considered. This was recognised by Wilson and Dawson JJ in Stevens v. Brodribb ((1986) 160 CLR 16 at 36) (Stevens v. Brodribb), where they state:

In many, if not most cases, it is still appropriate to apply the control test in the first instance because it remains the surest guide to whether a person is contracting independently or serving as an employee.

Application of the common law to your case:

The Worker was required to supervise the Principal's staff and his duties varied from day to day. He would check and inspect (onsite or by work orders) work completed the previous day by the crews and would schedule the work for the coming day.

The Principal has advised that the Worker provided training to new staff in the field and would discuss the work performance with the crews.

The Worker would quote new work either onsite or via the internet and would inspect equipment.

The Worker was not provided with any training as he has industry experience necessary to complete the role. The Worker has advised that he was provided with manuals to assist him to complete his duties.

The Principal has advised that there were no set hours. The Worker was required to perform a task in whatever days and whatever hours were required and was not entitled to paid breaks.

The Worker has not indicated if there were set hours, rather he has advised that he generally worked from 9.00am to 6.30pm and he was required to attend to after hours calls during the night. The Worker indicates that he was entitled to a paid lunch break.

The Principal has advised that the Worker was required to attend meetings with suppliers and with clients. The Worker was required to schedule works and meet with the Principal's staff at their premises.

The Principal has advised that they did not schedule the tasks of the Worker or direct where the tasks were to be performed. The Worker was not supervised other than liaising with management on a regular basis. If the Worker's tasks were not completed it would become immediately apparent to the Principal.

The Worker could refuse to do a particular task, such as operating a particular piece of machinery. The Worker did not wish to work nights and rarely did so and did not wish to start early due to family commitments.

The Worker has advised that he was required to attend weekly meetings with the Principal. The Principal scheduled the tasks to be carried out and that he had a set of tasks that were to be completed on a daily basis. The Principal directed where the tasks were to be performed and the tasks were completed at the Principal's office or on site. The Principal supervised his work and would ask daily if he had prepared the relevant shift forms and productivity reports.

The Principal has advised that if the Worker wanted to take time off, he was not required to seek the Principal's permission but was required to provide prior notice. In the Worker's absence his tasks had to be handled by a third party.

The Worker has advised that if he wanted to take time off he was required to obtain the Principal's permission approximately four weeks in advance. The Worker has advised that in his absence his tasks were handled by an employee of Principal.

The Principal and the Worker provide conflicting views on the questions relating to control, such as the scheduling of jobs or tasks, supervision and paid breaks. There is also conflicting information regarding the permission required relating to the Worker taking time off and who would complete his tasks in his absence.

Overall, we are satisfied that the control test in isolation is inconclusive.

3. Integration

Another significant factor in establishing the nature of a 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 his or her own business (under a contract for services as an independent contractor). This is known as the 'integration' test.

If the worker's services are an integral and essential part of the employer's business that engages them, they are considered by the courts to be a common law employee. If the worker is providing services as an individual carrying on their own business, they are an independent contractor.

It is necessary to keep in mind the distinction between a worker operating their own business and a worker operating in the business of the payer. The worker needs to be running their own business or enterprise and have independence in the conduct of their operations.

In Montreal v. Montreal Locomotive Works [1947] 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.

Similarly, in Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans [1952] 1 TLR 101 Denning LJ said:

...under a contract of service, a man is employed as part of the business, and his work is done as a 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.

The professional skills involved in carrying out the work are also a useful guide in determining whether a person is carrying on their own business or not. The provision of professional skills or skilled labour may imply that the contractor is able to make an independent career by selling that skill. In the case of a contractor with an independent career, it may be implied that the contractor is able to conduct their own business using those skills.

This was highlighted in Hollis v. Vabu Pty Ltd at paragraph 48, where the court said in relation to bicycle couriers hired by Vabu:

The couriers were not providing skilled labour or labour which required special qualifications. A bicycle courier is unable to make an independent career as a free-lancer or to generate any 'goodwill' as a bicycle courier…

Consideration may also be given to whether the worker could be expected to generate goodwill in their own right. If the benefits from the creation of goodwill flow to the worker then this would indicate that they are an independent contractor. Alternatively, if goodwill flows to the principal, this suggests an employer/employee relationship.

It is therefore necessary to consider whether the worker is providing services as part of the principal's business (under a contract of service as an employee) or providing services as part of their own business (under a contract for services as an independent contractor).

Application of the common law to your case:

The Worker has his own ABN and provided invoices to the Principal quoting his ABN. The invoices include an amount for GST which provides an indication that the Worker was running a business.

The Principal has advised that the Worker could provide his services to other individuals or businesses but the Principal had sufficient work so that he did not need to provide his services to other businesses.

The Worker has advised that he did not advertise his services nor could he provide his services to other individuals or businesses independently of the Principal.

The Worker was part of a team. The Principal has advised that he would provide training and supervision to the employees of the Principal, whilst the Worker has indicated that he did not train or supervise the work of other employees or workers of the Principal.

The Worker was not required to wear a uniform or name badge but was provided with a business card with the Principal's logo. Neither the Principal nor the Worker advertised on any tools or equipment used by the Worker, such as his vehicle.

Whilst there are again conflicting views from the Principal and the Worker in relation to the training and supervision of staff of the Principal, overall, we are satisfied that the integration test in isolation is more in favour of the notion that the relationship between you and the worker was one of principal and independent contractor.

4. Results test

Under a results based contract, payment is often made for a negotiated contract price, as opposed to an hourly rate. The meaning of the phrase 'producing a result' means the performance of a service by one party for another where the first mentioned party is free to employ their own means (that is, third party labour, plant and equipment) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

Satisfactory completion of the specified services is the result for which the parties have bargained. That is, a payment becomes payable when, and only when, the contractual conditions have been fulfilled.

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 (Australia) Pty Ltd v. FC of T) 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.

While the notion of 'payment for a result' is expected in a contract for services, it is not necessarily inconsistent with a contract of service. For example, the Full Court of the Supreme Court of South Australia in the decision of Commissioner of State Taxation v. Roy Morgan Research Centre Pty Ltd (2004) SASC 288 (Commissioner of State Taxation v. Roy Morgan Research Centre Pty Ltd), found that interviewers who were only paid on the completion of each assignment not on an hourly basis, were employees and not independent contractors. It was found that the workers were paid for their time spent and labour, and not to produce a result.

Having regard to the true essence of the contract, the manner in which 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. Generally, where a worker submits quotes or issues invoices for each job to the principal, this would be consistent with operating their own business. Nonetheless, the issuing of invoices is not necessarily determinative of the nature of the relationship.

Accordingly, the contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties.

Application of the common law to your case:

The Worker submitted invoices to the Principal on a fortnightly basis. The invoices provided the description of "Management Services" and included components for labour, vehicle and expenses and included an amount for GST.

Whilst the invoices specify the components, they do not indicate the number of hours that related to the labour component of the invoice or the hourly or daily rate of pay.

Initially the fees for the Workers services were set via negotiation between the Principal and the Worker. During the duration of the relationship, the Worker requested increases to his fees which were agreed to by the Principal.

The payment for the Workers services was made directly into his bank account on a fortnightly basis after submission of the invoices. The employees of the Principal are paid on a weekly basis.

We can not find any evidence to suggest that the Workers payments were dependant on the completion of a task or job, rather the payments related to ongoing services.

Overall, we are satisfied that the results test in isolation is inconclusive.

5. Delegation

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 the contract does not expressly require the worker to personally perform the services, an independent contractor has the capacity to delegate or subcontract all (or some) of the work to others. Where the worker delegates, they are responsible for remunerating that worker.

In the case of Neale (DFC of T) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419 at 425; 6 AITR 201 at 202, the High Court interpreted the words 'a contract which is wholly or substantially for the labour of the person to whom the payments are made' to decide that if a contract leaves a person completely free, if he or she chooses, to engage others to perform the work on his or her behalf means that the payments are not payments under a contract for labour. That is so even if the contractor actually does perform the work personally and had no intention of doing otherwise.

If the contract leaves the contractor free to do the work himself or employ other persons to carry it out the contractual remuneration when paid is not a payment made wholly or at all for the labour of the person to whom the payments are made. It is a payment made under a contract whereby the contractor has undertaken to produce a result.

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 employee has merely substituted or shared the workload.

However, a clause in the contract may permit the worker to delegate the task to another worker subject to approval of the principal, as the principal may not want an unknown worker to be working on their site or who may not be suitably qualified.

In the case of Bowerman v. Sinclair Halvorsen Pty Ltd [1999] NSWIRComm 21, Bishop J said:

The fact that any substitute driver had to be approved by the company does not give the respondent [the principal] control over that delegation… the company surely had the right to be confident that any substitute driver was competent to do the job and maintain the "integrity" of the company as Mr Coomb put it.

Therefore, under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). A person who has a right to delegate work (whether or not that right is exercised in practice) does not work under a contract wholly or principally for their labour. Unless the contract expressly requires the service provider to personally perform the contracted services, the contractor is free to arrange for his or her employees to perform all or some of the work or may subcontract all or some of the work to another service provider.

Application of the common law to your case:

There was no written contract entered into and both the Principal and the Worker advised that there were no specific instructions given in relation to whether the Worker was to complete the work personally. The Principal has advised that it was expected that the Worker would complete the work due to his skills.

The Worker had advised that if he went on holidays then he would have to plan and prepare the work for the period and the General Manager would see that it was done. He could organise for his work to be completed by an employee of the Principal.

The Principal has advised that if the Worker was sick or went on holidays, the General Manager arranged for his work to be done in his absence. The Worker could not organise for the work to be completed by an employee of the Principal nor could the Worker engage another person with or without the Principal's approval.

If the Worker was away his work was either delayed where possible until his return or essential matters were handled by employees of the Principal.

Whilst there are again conflicting views from the Principal and the Worker in relation to the delegation of work and if the Worker organised his tasks to be completed by an employee of the Principal, overall, we are satisfied that the delegation test in isolation is more in favour of the notion that the relationship between you and the Worker was one of employer and employee/s.

6. 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 service, or a contract with an independent contractor.

As stated by McKenna J in Ready Mixed Concrete (South East) Limited v. Minister Pensions and National Insurance [1968] 2 QB 497 at 526:

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

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.

Carrying their own insurance and indemnity policies is an indicator that a worker is engaged as an independent contractor.

Application of the common law to your case:

The Principal has advised that neither they nor the Worker were responsible for insurances such as workers compensation insurance, private accident insurance or public liability insurance. The Principal has advised that the Worker was not required to guarantee his work for any period of time.

The Worker has advised that the Principal was responsible for paying insurances.

Whilst we are unable to ascertain who was ultimately liable for insurance it appears that the Principal would have borne most of the commercial risk in terms of work completed by the Worker.

The Principal would have an obligation to their clients to ensure that the work was completed to a satisfactory standard and within a set timeframe. The Principal would have been ultimately responsible for the rectification of any poor workmanship, which in turn would affect their profit margin.

Overall, we are satisfied that the risk test in isolation was more in favour of the notion that the relationship between you and the Worker is one of employer and employee.

7. 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 their own business often provide and pay for their own assets, tools, equipment, maintenance costs and other expenses. Usually, they will have factored these costs in their overall fee or will seek separate payment for such expenses from the principal.

In Stevens v. Brodribb at 36-37, the High Court observed that working on one's own account (as an independent contractor) often involves:

The provision of him by his own place of work or of his equipment, the creation of him of goodwill or saleable assets in the course of his work, the payment by him from his remuneration of business expenses of any significant proportion…

Application of the common law to your case:

The Principal advised that the Worker was responsible for the provision of his own vehicle and telephone and that he covered all costs. The Principal provided a desktop computer linked to a group server. The vehicle provided by the Worker is a significant capital item in comparison to the computer provided by the Principal

The Workers invoices included amounts for vehicle and other expenses such as the mobile phone. No receipts were provided in respect of these amounts, therefore this cannot be considered a reimbursement of these amounts, rather these amounts relate to the provision of the Worker's services.

As the Worker's role related to the supervision of staff, no materials were required for the role. The Worker was required to wear protective work gear being a safety vest which was provided by the Principal and boots and glasses which were provided by the Worker.

Overall, we are satisfied that the capital test in isolation is more in favour of the notion that the relationship between you and the Worker was one of principal and independent contractor.

Our conclusion regarding the common law definition of employee

With respect to the relationship between you and the Worker, the facts and evidence provided points to the conclusion that the Worker was not a common law employee of the Principal.

As the facts and evidence indicate that the Worker was not your employee under common law, we are required to consider the expanded definition of employee under subsection 12(3) of the SGAA.

Question 2

Was the Worker your employee by virtue of subsection 12(3) of the SGAA?

Expanded definition of employee for SGAA purposes

The expanded definition of employee within subsection 12(3) of the SGAA, which states:

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.

SGR 2005/1 explains when an individual is considered to be an 'employee' under section 12 of SGAA.

Paragraph 78 of SGR 2005/1 states that where the terms of the contract, in light of the subsequent conduct of the parties, 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 to delegate); and

· the individual is not paid to achieve a result

The contract is considered to be wholly and principally for the labour of the individual engaged, and he or she will be an employee under subsection 12(3) of the SGAA.

Wholly or principally for labour

In assessing whether a person has been remunerated wholly or principally for labour and skills the ATO view is that, in the context of subsection 12(3) of the SGAA the word 'principally' assumes its commonly understood meaning that is, chiefly or mainly and labour includes mental and artistic effort as well as physical toil.

A contract may be partly for labour and partly for something else, such as the supply of goods, materials or hire of plant or machinery. Subsection 12(3) of the SGAA only applies if the contract is wholly or principally for labour.

Generally the value of various parts of a contract is specified in the contract (i.e. the labour and non-labour components of the contract are clearly expressed.

The invoices provided indicate that the Worker is paid for labour, vehicle and other expenses. In all invoices provided the combined vehicle and expense components exceed the labour component. Therefore, the contract was not wholly or principally for labour.

Based on the available facts and evidence, we consider that the Worker was not paid primarily for his own labour and skills.

The individual must perform the duties themselves

The second requirement of subsection 12(3) of the SGAA is that it requires the individual to carry out the work personally. That is, the worker does not have the right to delegate or subcontract the work to another party. Even if the contractor has no intention to delegate or subcontract the work and actually performs the work personally, the contract itself is still not for the labour of the person if there is a possibility of delegating work to another person.

As discussed earlier, we consider that the facts and evidence indicate that the worker did not have the right to delegate work to others.

Not paid to achieve a result

The third and last requirement of subsection 12(3) of the SGAA is that the payments received by the worker must not be in relation to the production of a given result, but instead should be for their labour.

As discussed earlier, we can not find any evidence to suggest that the Worker's payments were dependant on the completion of a task or job, rather the payments related to ongoing services. The facts and evidence provided are inconclusive in determining whether the Worker was paid for a result.

Our conclusion regarding the expanded definition of employee

Accordingly, as the Worker does not satisfy all three components of the expanded definition under subsection 12(3) of the SGAA, he does not meet the expanded definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

Upon considering all the available facts and evidence the Commissioner is satisfied that with respect to work performed for the Principal, the Worker did not meet the definition of an employee for the purposes of the SGAA under either common law or the expanded definition provided under subsection 12(3) of the SGAA. Accordingly the Principal did not have an obligation to pay superannuation contributions for the benefit of the Worker under the SGAA.