Edited version of administratively binding advice

Authorisation Number: 1012277883913

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Advice

Subject: Status of the worker

Question 1

Are the consultants you retain considered common law employees as defined in subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

Yes, please refer to the explanation below

Question 2

Are the consultants you retain considered employees as defined in subsection 12(3) of the SGAA?

Advice

Yes, please refer to the explanation below

Question 3

Are the consultants you retain considered common law employees as defined in subsection 12(1) of the SGAA where the principal contracts with a company or trust which subsequently employs the worker?

Advice

No, please refer to the explanation below

This advice applies for the following period

I July 2012 - 30 June 2013

The arrangement commences on:

1 July 2012

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

In your application for a private ruling you provided the following information:

The consultants perform the vast majority of their work on-site at client premises, having their own workstation/workspace.

The consultants do not perform the contract work at your premises.

The consultants provide their own equipment necessary discharge their role.

You are invoiced by the consultants

You pay the invoices and then charge the third-party client.

Contractors fill out time sheets and are paid based on the period of time worked rather than on the performance of the contract.

Under the terms of the engagement with the company, the contractors must perform the work personally, and are unable to delegate the work or sub-contract it to another party.

You provided a copy of the contract (the Agreement) that you request the contractors sign.

The Agreement contains the terms of engagement, of payment, treatment of expenses, qualifications, performance and termination clauses, liabilities and indemnities, and insurance requirements.

You provided the following information:

· the consultant is identified as being a separate consultant contracting through you.

· the contractor cannot subcontract (despite there being provision within the contract).

· a copy of a timesheet used by the consultant and the client.

· a copy of an invoice issued to you from the consultant

· a copy of the invoice you issue to the client.

The timesheet provided states that 'by signing this you are verifying the hours worked and that you are satisfied with the work completed during this period. Should you not be satisfied with the work completed during this period please contact your Consultant'

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 section 12

Superannuation Guarantee (Administration) Act 1992 subsection 12(1)

Superannuation Guarantee (Administration) Act 1992 subsection 12(3)

Reasons for decision

Question 1

Summary

Having considered the nature of the working relationship between the parties and the relevant case law, and putting in balance the relevant indicators, it has been determined that a common law employment relationship exist between the parties and that the consultants are considered to be employees under the extended definition of employee contained in subsection 12(3) of the SGAA.

However, the consultants you retain will not be considered to be employees where you enter into a contract with a company or trust which subsequently employs the worker.

Detailed reasoning

Tripartite employment arrangement

A characteristic of the labour market in Australia is that firms (end-users of labour) often acquire the services or labour of individuals through an intermediary rather than engaging them directly. Many of these intermediaries specialise in the supply of the services or labour of workers to client firms.

In contrast to the conventional working relationship between an entity and worker in which a single contract is formed, a number of contracts are often present in these tripartite working arrangements. Accordingly, it can sometimes be difficult to tell whether the worker is an employee of the intermediary or end-user, or neither, when they are engaged through an intermediary.

Superannuation Guarantee Ruling SGR 2005/2: Work arranged by intermediaries (SGR 2005/2) provides our view on how the definitions of employer and employee in the Superannuation Guarantee (Administration) Act (SGAA) apply to contractual and working arrangements involving tripartite employment arrangements.

SGR 2005/2 provides that whatever the circumstances of a particular tripartite working arrangement, it is first necessary to determine whether a contract for the performance of work exists and with whom it exists. Only after this is established can the precise nature of the relationship (whether employee or otherwise) be determined.

Paragraph 9 of SGR 2005/2 clarifies the two roles of intermediaries typical of tripartite arrangements. In one arrangement an intermediary agrees to supply the services of the worker to the end-user. In this instance a contract may exist between the intermediary and the end-user and between the intermediary and the worker. A contract does not exist between the worker and the end-user. In relation to this situation, paragraph 15 of SGR 2005/2 confirms that:

A contract between the intermediary and worker can still be a common law contract of employment even though the work is done for the immediate benefit of the end-user.

This is statement is expanded in paragraph 57 of SGR 2005/2 which states:

The Courts have held that a contract will not be inferred between the worker and end-user in a tripartite working arrangement merely because the end-user exercises the day-to-day or practical control over the worker. If there is no contract between the end-user and worker, there cannot be an employment relationship and the fact that the worker performs the work for the end-user at their premises and under the end-user's direction and control will not affect this conclusion.

The other arrangement exists to bring the worker and the end-user together so that the end-user and the worker can enter into a contract with each other. Such intermediaries are commonly referred to as 'labour hire firms' and 'employment or recruitment agencies'. In this instance neither an employer/employee nor principal/independent contractor contract exists between the intermediary and the worker. Importantly, paragraph 12 of SGR 2005/2 affirms that:

If there is no contract between the worker and end-user in a tripartite working arrangement, the worker cannot be an employee of the end-user.

The manner in which the relationship between the parties to a tripartite working arrangement is labelled or described is not conclusive in determining the nature of the relationship involving the parties to the arrangement. Expressions such as employment agency and labour hire firm that are often used to describe the use of various forms of labour market intermediary have no precise legal meaning.

In tripartite working arrangements, it is the ultimate or legal control over the worker that is most relevant not the day-to-day direction and control. Hence a contract between the intermediary and worker can still be a common law contract of employment even though the work is done for the immediate benefit of the end-user.

If a worker is not contracted personally to perform work or services but via an interposed entity such as a company or trust, neither the end-user nor the intermediary is the employer of the worker, because any contract they have is with the interposed entity and not with the worker. The worker may be the employee of the interposed entity.

Australian superannuation law

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

Where work is arranged for a worker through an intermediary, such as service firms, labour hire firms or employment agencies, the employer for superannuation guarantee (SG) purposes must be clearly identified because that entity will be required to satisfy the SGAA requirement in respect of that worker.

To establish whether a worker is an employee of either the intermediary firm or the end-user, it is necessary to determine whether a contract (written, oral or implied) exists between;

(a) the worker and the intermediary

(b) the worker and the end-user, or

(c) the intermediary and the end-user.

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 intermediary, end-user and worker can be a difficult task and will depend on the facts of each case.

Where workers are employed through intermediaries, the employer (if any) for SGAA purposes must be established as it is the employer who is required to satisfy the requirements of the SGAA in respect of these workers.

In these tripartite working arrangements, it is necessary to look beyond the form of the contractual relationships and the labels attached to the relationships by the parties to establish the true nature of the relationships of the parties involved

Consequently, it is necessary to examine all the facts and circumstances surrounding the formation of the contract and the obligations of all parties to determine whether there is an obligation to make superannuation guarantee payments in accordance with the provisions of the SGAA and the Superannuation Guarantee (Charge) Act 1992; and if so, upon whom that obligation rests.

The term 'employee', is defined in section 12 of the SGAA, to include common law employees, and is also extended to include workers who are engaged under a contract wholly or principally for their labour. The employment relationship is often referred to as a 'contract of service'. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1: Who is an employee? (SGR 2005/1) from a 'contract for service' which is typically a contractor and principal type of relationship that does not attract any 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 extended definition of 'employee' in subsection 12(3) of the SGAA applies.

Accordingly it is necessary to determine the true nature of the whole relationship that exists between the hospital and their agents/workers, as to whether there is a common law employer/employee relationship, or whether the workers meet the extended definition of employee under subsection 12(3) of the SGAA.

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, which 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 be taken on balance, 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...the question is one of degree for which there is no exclusive measure.

While various factors have been identified by the courts as indicators of the true nature of the relationship, those features are only ever a guide to answering that question. 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 his or her own behalf (as an independent contractor).

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 it is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. Subsequent conduct of the parties may demonstrate the relationship has a character contrary to the terms of the contract.

Terms of engagement

The courts and various State Industrial Relations Commissions have considered the nature of the tripartite working arrangements in an industrial relations, workers compensation and pay-roll tax context in a number of cases.

The issue of whether a contract exists is a separate and distinct matter from the categorisation of a contract as one of employment or otherwise.

Those cases confirm the principle that an employment relationship cannot exist unless a contract exists between the worker and either the end-user or intermediary, whether the contract is written, oral or implied. These cases also illustrate the importance of applying the principles of contract law to determine whether a contract exists.

An agreement between parties will not be given effect as a legally enforceable contract by the courts unless a number of elements are present. In particular:

· the parties must intend to be legally bound by their agreement

· there must be an offer by one party and its acceptance by the other, and

· the promises which constitute the agreement must be supported by consideration (unless the agreement is in the form of a deed).

Therefore, in determining whether a contract of engagement exists, the relevant questions to be asked are:

· whom could the end-user sue for breach of contract (as distinct from negligence) if the worker failed to appear or failed to work at an acceptable standard? and equally,

· whom could the worker sue for breach of contract if they performed their work but their remuneration was not paid to them?

If, after applying the principles of contract law, it is found that there is no contract between the worker and the end-user in a tripartite working arrangement, the worker cannot be an employee of the end-user for the purposes of SGAA. Similarly, if there is no contract between the worker and intermediary, the worker cannot be an employee of the intermediary under the SGAA.

 In the case of Building Workers Industrial Union of Australia and Others v. Odco Pty Ltd (1991) 29 FCR 104 (Odco case), Wilcox, Burchett and Ryan JJ in their joint judgment held that an employment relationship did not exist between the end-user and worker provided by the intermediary, Odco, because a contract did not exist between the worker and end-user. The court found that there was a contract between the worker and the intermediary, even if it was not one of employment.

In Drake Personnel Ltd & Ors v Commissioner of State Revenue 25 [2000] VSCA 122 (Drakes case), the Court of Appeal held that the workers were common law employees of Drake (intermediary firm). In holding that Drake was the relevant employer in the tripartite working arrangements, emphasis was placed on the fact that there was no contract between the clients of Drake and the workers. It was also stated that the contract between Drake and the workers arose only as and when work was accepted by the workers. It was confirmed that an agreement to perform work concludes when the worker accedes to the intermediary's request to attend at a particular site on a given day.

In the case of Damevski v. Guidice and Ors [2003] FCAFC 252 (Damevskis case), the Full Court provided a particularly pertinent example of the application of the principles of contract law to a tripartite working arrangement. Essentially this case involved the conversion of a direct employment relationship between a company and worker to that of a supposed tripartite working arrangement using an intermediary, where nothing changed in the relationship and all the terms and conditions remained the same.

In considering whether there was a contract between the intermediary and the worker (Mr Damevski), the courts found no evidence of a verbal, written or implied contract between these two parties. The only contracts to be found were those between the intermediary and the end-user and the worker and the end-user, as Mr Damevski never made any contract with the intermediary.

The Courts have held that a contract will not be inferred between the worker and end-user in a tripartite working arrangement merely because the end-user exercises the day-to-day or practical control over the worker.

If there is no contract between the end-user and worker, there cannot be an employment relationship and the fact that the worker performs the work for the end-user at their premises and under the end-users direction and control will not affect this conclusion.

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.

In Hollis v. Vabu (2001) 207 CLR 21 (Hollis v Vabu) the High Court determined that an indicator of an employer/employee relationship was that the workers were presented to the public and to those using the courier service as representatives of Vabu, as they wore uniforms bearing Vabu's logo.

Additionally in Hollis v Vabu it was noted that although no payments of annual leave or sick leave were given, and no superannuation deductions were made in respect of the bicycle couriers, the relationship between the parties is to be found not merely from these contractual terms. The system which was operated there under and the work practices imposed by Vabu go 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 facts

The circumstances surrounding the formation of the contract may assist in determining the true character of the contract. In determining the intention of the workers, the Commissioner must decide what could reasonably be concluded from their actions. 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.

When considering the various criteria above it has been determined that the end-user would be entitled to sue you. Moreover, after examining the arrangement outlined in the contract provided, it has been determined that a contract does not exist between the end-user and the worker, consequently, the worker cannot be considered to be an employee of the end-user.

The relationship between yourself and the consultant is documented within the Agreement which quite clearly demonstrates the intention of the parties is that the relationship between the Company and the Consultant is that of principal and contractor.

Therefore it is concluded that the intention of the parties at the formation of the contract was that the relationship would be one of principal and contractor.

Control Test

A prominent factor in determining the nature of the relationship between parties is the degree of control which the employer has over the employee, as it goes to the root of the classical view of the master-servant relationship. The degree of control varies with the type of job, as the increasing usage of skilled labour has seen a consequential reduction in supervisory functions. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but rather whether they have the right to exercise it.

Traditionally, a common law employee is told what work needs to be done, how it is to be done, and where it is to be done. However 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 and a high degree of direction and control is not uncommon in contracts for services.

It is not necessary for the employer to exercise day to day control over the worker. What is important is that the employer has the legal right of control. In Zuijs v.Wirth Brothers Pty Ltd (1955) 93 CLR 561 (Zuijs) the High Court articulated the significance of control in an employment relationship in the following way:

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.

Additionally, Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 stated:

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 performance of his work resided in the employer so that he was subject to the latter's orders and directions.

This is particularly relevant in relation to tripartite working arrangements, where it is the ultimate or legal control over the worker that is more relevant; not the day-to-day of the intermediary firm.

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. In Hollis v. Vabu (2001) 207 CLR 21 (Hollis), where the decision was that bicycle couriers were considered to be employees, Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ observed that:

Vabu's whole business consisted of the delivery of documents and parcels by means of couriers. Vabu retained control of the allocation and direction of the various deliveries…Their work was allocated by Vabu's fleet controller. They were to deliver goods in the manner in which Vabu directed. In this way, Vabu's business involved the marshalling and direction of the labour of the couriers, whose efforts comprised the very essence of the public manifestation of Vabu's business.

In consideration of the type of work performed by the workers and the skills they possessed, the Commissioner believes that telling the workers what was required to be done is a basic minimum of information required for them to determine whether they could/would accept the job, and did not amount to an exercise of control over how they were to perform the work.

Due to 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 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 an individual in the performance of their work resided in the employer so that they were subject to your orders and directions.

A payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract. However, the mere fact that a contract may specify in detail where the contracted services are to be performed does not necessarily imply an employment relationship, and a high degree of direction and control is not uncommon in contracts for services.

While it is traditionally more indicative of an employer/employee relationship, the issue of seeking permission or providing prior notice for taking time off, is not especially conclusive in determining the true nature of the relationship. In an ongoing relationship between an independent contractor and principal, it is reasonable to conclude that a worker would need to provide adequate notice to the payer to organise a replacement if the work needed to continue

In determining the nature of the working relationship between the parties, the Commissioner considers whether the principal had the ultimate authority to control, regardless of whether that control was exercised on a day to day basis.

Application of the common law to your facts

In this situation, there is a formal contract (the Agreement) between yourself and the end-users. There is no formal contract between the end-users and the workers.

The Agreement between the parties outlines the expectations of a consultant retained under the Agreement, however it is considered that the Company's primary role is to assign to the third-party client a consultant to undertake the work.

You have contented although you assign the third-party client the best suited consultant to undertake the work, you have no control over how the consultant actually performs the work itself (other than the general requirement to work set hours and on-site at client premises). The consultants are free to exercise their own discretion and make their own decisions as to how they carry out their work. If direction is sought by or instructions are given to the consultant in relation to the work itself, these come from the client.

However, the terms of the Agreement give you ultimate control over the performance of the worker and the termination of the workers services.

Hence it is considered that whilst you do not exercise control on a day to day basis, you do possess ultimate control over the consultants. Therefore, it is considered that for the purposes of this test the relationship between the parties is one of employer/employee.

Integration Test

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 otherwise known as the 'business' or 'integration' test.

Whether the worker operates on their own account or as part of a business of the payer is sometimes viewed as a consideration of whether the worker would be viewed by a third party as carrying on their own enterprise as an independent contractor or operator and whether they could be expected to generate goodwill in their own right.

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 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.

The Full Bench of the High Court in Hollis 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.'

The 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 skill 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 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…

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.

Application of the common law to your facts

You have contended that there is no ongoing employment contract between yourself and the consultants who are engaged to complete specific work with third-party clients and although from time-to-time one engagement may sometimes lead to another, the engagement is not ongoing but rather specific.

We acknowledge the contentions you have raised; and the information you have provided stating that the consultant is identified to the clients as being a separate consultant.

However, the timesheet provided states that 'by signing this you are verifying the hours worked and that you are satisfied with the work completed during this period. Should you not be satisfied with the work completed during this period please contact your Consultant'.

Therefore it is considered that this indicates that the consultant's supervisor within the client organisation could reasonably assume that the consultant was an integral part of your operations. Therefore it has been determined that the result of this test indicates that the relationship is one of employer/employee.

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. The production of a given result is considered to be a mark of independent contractor status (World Book (Australia) Pty Ltd v. FC of T (1992) ATC 4327).

'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.

In a contract for services (whether written, oral or implied), 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 dependant on, or referable to, the completion of the specified services.

While the notion of 'payment for result' is expected with a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis considered that the payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries.

Accordingly, the contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties and what the worker was hired to do.

Generally where a worker is paid a set amount per task, this is a clear indicator of a contract for result, typical of a principal and independent contractor relationship. However, it should be also noted at this point that payment for result it is not necessarily inconsistent with a contract of service.

Conversely, giving the nature of the industry a payment per completed file may be a convenient or natural way to measure and remunerate work performed by agents/workers (a piece rate basis).

Additionally, a contract to achieve a specified result would generally be formulated on an individual basis.

Application of the common law to your facts

As mentioned above, '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.

This Agreement reveals that the Consultants are paid for the number of days worked, rather than for the achievement of a specific result. Moreover, the timesheet provided states that 'by signing this you are verifying the hours worked and that you are satisfied with the work completed during this period". This statement clearly indicates that the consultants are being remunerated on an daily basis, rather than for the provision of a specified result.

Therefore, it is considered that the results of this test indicate that there is a employee/employer relationship.

Delegation Test

The unlimited power to delegate or subcontract work is an important factor in deciding whether the worker is an employee or independent contractor. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the Principal), this is a strong indication that the person is being engaged as 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 tasks 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 freely subcontract or employ others to perform the work.

Application of the common law to your facts

Generally a true right to delegate would require the individual contractor to source and pay the replacement worker, as well as take responsibility for any defective work completed by the replacement worker.

We acknowledge your contentions that under the terms of the engagement with the company, the contractors must perform the work personally, and are unable to delegate the work or sub-contract it to another party.

Moreover, it is considered that the Agreement is unclear as to the right of delegation.

The information you provided states that under the terms of the engagement with the company, the contractors must perform the work personally, and are unable to delegate the work or sub-contract it to another party.

In a telephone conversation we highlighted that the contract provided was unclear as to the right of delegation, the application specifically stated that they couldn't delegate. In this conversation we sought clarification of this issue.

In another telephone conversation you stated that the consultant cannot subcontract.

Therefore on the balance of the evidence provided the Commissioner considers that the result of the delegation test is indicates that the relationship is one of employee/employer

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 common law to your facts

As mentioned above, for an individual to be deemed to be an independent contractor, they should be exposed to a higher degree of risk; that is they have a greater exposure to the risk of commercial loss (and the chance of commercial profit).

You have contended that the contractors largely bear the commercial risks for their work. As a condition of their engagement with the company, the contractors carry their own public liability and professional indemnity insurance of $X million and $Y million respectively. They must also carry their own workers compensation insurance.

The Agreement between the parties provides that the Consultant will perform its obligations under the Agreement at its own cost, and will not be entitled to be reimbursed for any expenses incurred in connection with the performance of the Consultant's duties under this Agreement unless outlined in the Schedules.

Hence the Commissioner considers that the results of this test indicate that the relationship was employee/employer.

Capital

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 consultants carrying on their own business 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 common law to your facts

You have contended that the contractors provide their own tools and equipment necessary to discharge their role. The Agreement between the parties is silent as to the provision of capital and equipment.

Additionally, the information provided states that the consultants perform the vast majority of their work on-site at client premises, having their own workstation/workspace and provide their own equipment necessary discharge their role.

Therefore, the Commissioner has decided that the results of this test are inconclusive in determining whether and principal/contractor or employee/employer relationship exists.

Conclusion - Common Law

With respect to the Common Law tests, the Commissioner has determined that the results of these tests indicate that an employment relationship exists. However, the extended definition contained within subsection 12(3) of the SGAA will also be considered in order to provide further clarification of the matter.

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

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 of the contract. Subsection 12(3) was intended to extend the scope of the SGAA beyond traditional employment relationships to take into account some independent consultants who principally provide their own labour to meet obligations under a contract.

SGR 2005/1 provides further guidance on this issue and at paragraph 11 states where the terms of the contract indicate that:

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

· 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.

Each of the three conditions must be met before subsection 12(3) of the SGAA can be satisfied.

Were the workers remunerated 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.

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.

In this instance, it is concluded from the wording of the Agreement that the consultants are being wholly or principally remunerated for their labour.

Were the workers required to perform the work personally?

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.

Upon examining the evidence, in particular the information you provided in telephone conversations, it has been determined that the workers were required to perform the work personally.

Were the workers 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.

Upon examining the evidence, in particular the timesheets and other information you provided it has been determined that the workers were not paid to achieve a result

Conclusion - extended definition of employee

As stated above, each of the three conditions in paragraph 11 of SGR 2005/1 must be met before subsection 12(3) of the SGAA can be satisfied. In this case all three conditions have been satisfied; therefore it is considered that the consultants meet the extended definition of employee as set out in subsection 12(3) of the SGAA.

Conclusion - overall

Having considered the nature of the working relationship between the parties and the relevant case law, and putting in balance the relevant indicators, it has been determined that a common law employment relationship exist between the parties and that the consultants are considered to be employees under the extended definition of employee contained in subsection 12(3) of the SGAA.

Contracts between the principal and an interposed entity.

If a worker is not contracted personally to perform work or services but via an interposed entity such as a company or trust, neither the end-user nor the intermediary is the employer of the worker, because any contract they have is with the interposed entity and not with the worker. However, the worker may be the employee of the interposed entity.

Therefore, the consultants you retain will not be considered to be employees where you enter into a contract with a company or trust which subsequently employs the worker.