Edited version of administratively binding advice

Authorisation Number: 1012395192797

This edited version of your advice will be published in the public Register of private binding rulings after 28 days from the issue date of the advice. The attached ATO advice fact sheet has more information

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Advice

Subject: Superannuation guarantee - status of the worker

Question 1

Is the Worker an employee of the Principal under subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

No. Please refer to 'Why we have made this decision'.

Question 2

Is the Worker an employee of the Principal for the purposes of subsection 12(3) of the SGAA for the relevant quarters?

Advice

No .Please refer to 'Why we have made this decision'.

The arrangement commences on:

After 1 July 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 Principal is an Australian proprietary company.

The Principal used the services of an agency, to identify and subsequently appoint the Worker.

The Principal formed a verbal contract for the provision of services with the Worker.

These services were unrelated to the core services provided by the Principal's business.

The Principal paid the worker for the provision of the services.

The Worker pays an agency fee to the Agency.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

Reasons for decision

Question 1

Summary

The facts and evidence suggest that the worker was not an employee under common law for the purposes of the SGAA. Therefore there is not an obligation to pay superannuation contributions on behalf of the worker.

Detailed reasoning

Ordinary meaning of employee under subsection 12(1) of the SGAA

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).

Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? explains when an individual is considered to be an 'employee' under section 12 of the SGAA. The question of whether someone is an employee is one of fact, and is determined by examining the terms and circumstances of the contract, in conjunction with the key indicators expressed in common law. The totality of the relationship must be considered to determine whether, on balance, the worker is an employee. No one indicator is in itself determinative of the relationship. These indicators are discussed below.

Terms and circumstances of the formation of the contract

The fundamental task with respect to the terms of engagement test is to determine the nature of the contract between the parties. We must determine the nature of the contract between the parties, consider whether the contract is written or verbal, and whether the terms and conditions are expressed or implied. These factors are important in characterising the relationship between the parties.

When considering the intentions of the parties in forming the contract, the task is to decide what each party could reasonably conclude from the actions of the other. 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 your case

Although the Agreement is between the Principal and the Agency rather than the Principal and the Worker, the content of the Agreement is indicative of the intentions of the Principal and the Worker in that they were prepared to engage on the basis of service provision rather than on the basis of employee related entitlements and conditions for a particular employee. The Principal advised that the Worker had no annual leave, sick leave, long service leave, or other benefits and allowances.

The Principal used the Agency to source a service which was to be provided by the Worker appointed, but may have been provided by other workers registered with the Agency. This is in contrast to the Principal advertising for a worker, and offering the normal conditions and entitlements associated with an employee.

The Principal and the Worker could reasonably conclude from the actions of each other that there was no intention to form an employer and employee relationship.

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

Control

The extent to which the engaging entity 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 lays not so much in its actual exercise, but in the right of the employer to exercise it.

In your case

You have advised that the Worker was not closely supervised as they had the keys to your business and usually completed the work when you were absent from the premises. They did not require close supervision as they knew what work had to be done.

It appears that the Principal told the Worker what work was to be done via completion of the Agency booklet, but did not provide any direction and control as to how the work were to be performed. No evidence was provided that any training was provided by the Principal.

Although the Principal did not direct and control the work, it is unclear as to whether there was a right to exercise that control and direction.

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

Integration

If the worker's services are an integral and essential part of the business that engages them (under a contract of service), 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 (under a contract for services), 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.

In your case

The Principal is in the business of providing advice to clients. The Worker provided other services to the Principal and also to other employers.

No evidence was provided that the Worker was to work exclusively for the Principal and the duration of the working arrangement was approximately four and a half months.

It is apparent that the services did not form an integral and essential part of the Principal's business.

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

'Results' contracts

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. Payment is often made for a negotiated contract price, as opposed to an hourly rate.

In your case

Although it is not necessarily determinative of the nature of the relationship, the Worker issued invoices to the Principal on completion of each weekly job. Additionally, as confirmed by the Worker in the Document provided by the Principal, the payments made by the Principal were included as earnings by the Worker in their tax return and they also claimed the Agency fees as an expense. These actions by the Worker are more consistent with the operation of a business.

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

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.

In your case

The Principal engaged the services of the Agency with the result that the Worker was appointed in a specific capacity. The Worker was she free to accept or refuse work and to work for other parties.

The Principal had the right to engage any registered worker from the Agency rather than the Worker's personal services in particular.

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

Risk

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees, whereas a principal will not be liable for negligence or injury caused by 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.

In your case

Although our focus is on the relationship between the Worker and the Principal, it is evident from the structure of the Agreement between the Principal and the Agency that the Principal would not need to put in place any public liability insurance normally associated with having employees.

The Principal has not acted in a manner that indicates they have taken steps to limit liability for negligence and injury caused by the Worker. The Worker bears minimal risk. Overall, we are satisfied that the risk test in isolation, is more in favour of the notion that the relationship between the Principal and the Worker is one of principal and independent contractor.

Provision of tools and equipment and payment of business expenses

A worker/payee who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required to complete their 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 they will seek separate payment for such expenses from the principal.

In your case

The Principal has advised that they provided some materials for use by the Worker.

Overall, we are satisfied that the 'provision of tools and equipment and payment of business expenses' test in isolation, is more in favour of the notion that the relationship between the Principal and the Worker is one an employer/employee relationship.

Conclusion-common law

The working arrangements involved three parties: the Worker; the Principal; and the Agency. The role of the Agency was to bring the Principal and the worker together so that the Principal and the Worker could form a contract with each other. Although the Principal/Worker relationship is the relationship of focus, to gain an understanding of the intention of these parties, we have also taken into account the Principal/Agency relationship.

Apart from the Principal providing tools and equipment there appears to be few other aspects of the Principal/Worker relationship which support the relationship as being that of employer and employee. The Worker was engaged on the basis of a fixed payment for provision of nominated services, had no annual leave, sick leave or long service leave entitlements, was not integrated into the Principal's business, was able to arrange replacement workers, and was not covered under any of the Principal's insurance policies.

In conclusion under section 12(1) of the SGAA, when looking at the totality of the relationship, the facts and evidence indicate that while the specific terms under which the Worker was engaged are unclear, because the Worker was engaged on a verbal basis associated with an Agency Agreement, you have provided adequate explanation and evidence to allow us to gain an understanding of the relationship.

The facts and evidence indicate that the Worker was not an employee under common law.

Question 2

Employee under subsection 12(3) of the SGAA

Detailed reasoning

The Commissioners' view, as expressed in SGR 2005/1, is that some contracts for service will be wholly or principally for labour of the individual contracted even though the individual is not a common law employee.

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.

The expanded definition of employee within section 12(3) of the SGAA, 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.

To determine whether the contract is wholly or principally for the labour of the person, we examine the terms of the contract, in light of the subsequent conduct of the parties. We consider whether:

· 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.

Is the Worker remunerated (either wholly or principally) for their personal labour and skills?

In this context, 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.

In your case

The Principal paid the Worker a fixed amount for completing the task irrespective of the time that the task took.

In these circumstances it is clear that the Worker was being paid principally for their labour and skills.

Is the Worker required to perform the work personally?

Delegation is generally implied in a contract for services where the emphasis is on the result rather than the 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 are merely self-serving statements.

In your case

As discussed earlier, although a particular Worker was appointed originally, both the Principal and the Worker could arrange for the work to be completed by other workers registered with the Agency. The Principal had the right to engage any registered worker from the Agency rather than the Worker's personal services in particular.

Is the Worker paid to achieve a result?

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 his/her own means to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

In your case

The Principal confirmed that a fixed payment would be made for the negotiated task regardless of whether the work took a shorter or longer time.

Summary - Employee under subsection 12(3) of the SGAA

In summary, it is considered that the contract between you and the worker was not wholly or principally for their labour under 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 we are satisfied the worker was not your employee for the purposes of the SGAA under either the common law or the expanded definition provided under subsection 12(3) of the SGAA. Accordingly you did not have an obligation to pay superannuation contributions for the benefit of the worker under the SGAA.