Edited version of your private ruling

Authorisation Number: 1012423465205

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Ruling

Subject: Employee versus contractor

Question 1

Are the contractors, when they engage with you under the 'Contractor Agreement', considered to be employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No

Question 2

Are you required to withhold Pay As You Go ('PAYG') withholding tax for remittance on behalf of these contractors?

Answer

No

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2012

Relevant facts

The company (you) applied for a private ruling to determine whether the services of inspectors provided to the company are considered to be performed as employees or contractors.

One of your business activities is the inspection of certain products.

Exporters hire you to inspect commodities during packing and loading, test the sample for quality and provide certificates based on the compilation of all information including the analysis done on your premises.

You use a number of contractors to allow you to provide these services to the exporters. The contractors are engaged to perform the on-site pre-laboratory part of these services, that is, inspecting, taking samples and testing.

Typically the contractors are paid based on the tonnage loaded. The contractors can work all over Australia. The records prepared by each contractor when attending the transfer and the samples collected by him or her at that time are remitted to you for storage.

The tools and equipment used by the contractors are purchased, repaired and maintained by the contractor and absorbed by the rates charged.

To date there has been no formal written contractual arrangement between you and the contractors, but they were engaged under a verbal agreement on mutually acceptable terms which have been in place for some time.

Most, if not all, of the inspectors perform services in several different areas to ensure they are working all year round. Some also work in different professions or conduct other businesses.

A Contractor agreement has been drafted in order to formalise the relationship between you and the contractors. It is intended that it be implemented in all agreements going forward following the receipt of the private ruling.

The terms of the proposed agreement include the following:

The inspector

· is free to continue to advertise his/her services;

· is entitled to perform services for others during the period of the agreement;

· is free to employ his/her own staff to assist in providing the services;

· is entitled to perform the services at such times that the contractor agrees with the packer

· may delegate any of the services to a third party

· must have his/her own personal professional liability insurance

· is not required to wear any uniform associating the contractor with the principal, but must wear appropriate eye/ear protection and protective footwear.

· must provide and maintain the equipment and tools necessary to perform the services.

· is paid by reference to the number of containers packed per month in respect of which the contractor has provided the services and achieved the result.

· must have his or her own personal professional liability insurance policy in place.

The company:

· became aware of the inspectors' business via word of mouth or tender;

· has no entitlement to stipulate to the contractor how he/she is to perform the services

· is not required to pay annual, sick, long service leave and any benefits under the Fair Work Act 2009 (Cth) for employees.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1.

Reasons for decision

Summary

Based on the information you have provided, we consider that the inspectors will be independent contractors, rather than employees, in the income years in question. Therefore, you are not required to withhold PAYG withholding tax for remittance on behalf of these contractors.

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA 1953 provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

Employee Vs Independent contractor

The distinction between employment and contract is the difference between a contract of service indicating an employee/employer relationship and a contract for service indicating a contractor/principal relationship.

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship).

The relationship between the independent contractor and the principal is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result).

An independent contractor works in his or her own business (or on his or her own account); an employee works in the service of the employer, that is, in the employer's business.

However, it is necessary to examine all the terms of the contract and to determine whether, on balance, the person is acting as an employee of another or is acting on his or her own behalf.

Whether the true nature of an arrangement between a payer and payee is that of employer/employee or principal/independent contractor is a determination which must be made by reference to the various indicators developed by the Courts. These indicators have been collated in Taxation Ruling TR 2005/16.

TR 2005/16 paragraph 7 provides:

'Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.'

The ruling has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

Conditions of Engagement

The terms and conditions of the contract whether express or implied, in the light of the circumstances surrounding the making of the contract, whether verbal or written, will always be of considerable importance to the proper characterisation of the relationship between the parties.

Some Conditions of Engagement are closely associated with employment and may, therefore, be persuasive indicators. For example:

· provision of benefits such as annual, sick, and long service leave;

· provision of other benefits prescribed under an award for employees;

· payer prescribed times and location for the performance of work;

· remuneration in the form of a salary or wage;

· the worker uses assets and materials provided by the payer or is reimbursed, or paid a compensatory allowance, for expenses incurred in respect of use of own assets and materials; and

· payer discretion (within the constraints of industrial relations laws) in respect of task allocation and termination of engagement.

However, this list is not exhaustive and it must be emphasised that there is not a standard set of conditions applicable to an employee and another (different) set applicable to an independent contractor.

All the facts of each case must be examined to determine whether it is an employment or contractor relationship. Most conditions, when viewed individually, will be equivocal as indicators of the true character of the contract.

In this case, the inspectors had a verbal contract with the company but this will be formalised soon.

The company does not prescribe the times to perform the work as the inspectors have the discretion to choose a time which suits them provided they agree with the packers.

The inspectors are not entitled to any annual, sick and long service leave or other employee benefits.

The inspectors are paid on a results basis, according to the number of boxes packed.

Upon consideration of the available facts and evidence, the provided terms of the agreement are more indicative of the existence of a principal/contractor relationship rather than an employer/employee relationship.

Control

The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, while control is important, it is not the sole indicator of whether or not a relationship is one of employment.

In the case, Zuijs v. Wirth Brothers Pty Ltd (1955) 93 CLR 561 the High Court said:

'What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters.'

In the case, Humberstone v Northern Timber Mills (1949) 79 CLR 389, Dixon J stated:

'The essence of a contract of service is the supply of the work and skill of a man.'

In the present case, there is no direct control exercised by the company on the inspectors. The activities carried out by the inspectors are not supervised and the work is completed in an inspector's own time provide they liaise with the packers.

The inspectors are not told how to do the work and they are free to employ their own staff to perform the work.

From this and other particular information supplied, there is no control exercised over the inspectors to perform the work.

Does the worker operate on their own account or in the business of the payer?

Another significant factor in establishing the nature of a contractual relationship at common law is the issue of whether the worker operates on their own account or as part of the business of the payer. This is sometimes viewed as a consideration of whether the workers would be viewed by a third party as carrying on their own enterprises as independent contractors or operators and whether they could be expected to generate goodwill in their own right.

In Hollis v Vabu, the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210;

'…the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.'

In Montreal v. Montreal Locomotive Works (1927) 1 DLR 161 at 169 Lord Wright said:

it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior.

Similarly, in Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans (1952) 1 TLR 101 at 111 Denning LJ said:

... under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

In this case, the inspectors in all cases trade as self-employed sole traders who provided services to others and do not work as an integral part of the company's business.

The company came to know of the inspectors' services through word of mouth and engaged the inspectors' services as a contractor.

These points would suggest that an independent third party is unlikely to view an inspector as being an employee of the company or being integrated into the business, concern or enterprise of the company. This is indicative of the inspectors not being employees of the company.

Results test

Under a results based contracts, payment is often made for a negotiated contract price as opposed to an hourly rate. The production of a specified outcome or result is not limited to the performance of one individual. The worker is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the result for which the parties have bargained.

TR 2005/16 paragraph 37 provides:

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

TR 2005/16 paragraph 38 further provides:

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

In this case, the inspectors are engaged to perform specific services in return for receiving a fee. Payment is by way of an amount per container packed and is invoiced at the completion of the job.

These points are clearly indicative of this arrangement not constituting an employment relationship.

Delegation

If a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result.

In this case, the inspectors are sole traders and have a right to employ or engage other labour to perform some or all of the services provided. Also the inspectors are free to provide services to other clientele.

All these facts point to an independent contractor relationship.

Risk and rectification of work performed

Whether the worker is contractually obliged to be liable for the cost - in terms of time or money - for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor. Commonly an independent contractor or entity would solely bare the risk and responsibility of liability for their work if it is not up to an agreed standard and would be required to either rectify this defective work in their own time or at their own expense. This means that an independent contractor will often carry their own insurance and indemnity policies.

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

In your case, the arrangement is such that the inspector stands to make a profit or loss on the task and bears the commercial risk. The inspectors are also liable for rectifying any defective services by him or her, and must, at his or her cost, rectify any faulty, defective or negligently performed services.

The inspectors must have their own personal professional liability insurance in place.

Accordingly, with respect to the risk test, the inspectors would be considered to be independent contractors.

Provision of tools and equipment and payment of business expenses

Another consideration of relevance is whether the worker provides their own tools and equipment and pays their own business expenses. It has been held in a variety of cases that the provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

There are situations where, having regard to the custom and practise of the work, or the practical circumstances and nature of the work, very little or no tools of trade or plant and equipment are necessary to perform the work. This fact alone will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this - or any other indicator - depends on the particular circumstances, the context and the nature of the contractual work.

Unlike an independent contractor, an employee is often reimbursed or receives an allowance for expenses incurred in the course of employment - including for the use of their own assets such as a car.

The inspectors must provide and maintain the equipment and tools necessary to perform the services.

With respect to the provision of tools and equipment test, the inspectors are considered to be independent contractors.

Other

Other indicators suggesting an employer-employee relationship include:

· the right to suspend or dismiss the person engaged;

· the right to the exclusive services of the person engaged;

· provision of benefits such as annual, sick and long service leave;

· provision of other benefits prescribed under an award for employees; or

· a requirement that a worker wear a company uniform.

In this case, you have no right to the exclusive services of the inspectors as most inspectors work for other companies. There is no provision of the usual employee benefits and no requirement to wear a uniform.

These points are indicative of this arrangement not constituting a principal/contractor relationship.

Conclusion

With consideration of all the facts presented in this case and with reference to the indicators provided in Taxation Ruling TR 2005/16, it is clear that the inspectors are engaged by the company as independent contractors and not as employees of the company.