Edited version of your private ruling

Authorisation Number: 1012553049926

Ruling

Subject: Employee v contractor.

Question 1

Are the workers engaged to work for Entity B considered to be employees of Entity A for income tax purposes?

Answer

No.

Question 2

Is Entity A required to withhold tax from payments made to the workers engaged to work for Entity B?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commenced on

1 July 2013

Relevant facts and circumstances

Entity A is seriously considering entering into a labour hire arrangement with Entity B.

Entity B provides services to people in their homes.

Entity A will enter into a contract with Entity B to obtain and provide workers.

Entity B will make payments to Entity A under the contract.

Entity A will engage workers to work for Entity B.

The workers will enter into a Service Contract with Entity A. Under the Service Contract the worker:

· is to provide the services

· is described as an independent contractor and not Entity A's employee, agent, partner, joint venturer or representative

· agrees to maintain an appropriate and legal business entity

· keep current public liability, professional indemnity and workers compensation insurances

· can delegate the work to a third party with Entity A's prior written consent

· chooses if they wish to be paid on an hourly rate or a callout/visit rate

· are required to submit an invoice to obtain payment

· are paid by Entity A

· agrees to comply with Entity A policies and procedures

· agree to wear supplied clothing branded with the name of Entity B

· use supplied Entity B branded business cards, stationery

· responsible for any claims against their work

· are to indemnify Entity A and Entity B in respect of claims, demands, actions, proceedings, costs, losses, expenses and damages are a result of a breach of the Service Contract by the worker

· cannot carry on similar services whilst under contract without Entity A's permission, and

· cannot carry on similar services within 12 months after termination of the Service Contract without Entity A's written permission

Entity B contacts workers to see if they are available to work particular shifts and then assign the available workers to shifts. A worker is not obliged to accept an offered shift.

If a worker cannot work a shift they contact Entity B.

If a worker arranges for another worker to perform their shift, they advise Entity B. The original worker receives payment from Entity A and is responsible for paying the replacement worker.

Workers who wish to be paid on an hourly basis, are paid for the full time they are rostered on irrespective of the number of clients visited.

Workers who wish to be paid on a per visit rate are paid for the number of visits they make during their rostered period.

Workers are driven to the visits by a driver employed by Entity A.

Workers supply their own tools but are supplied with a worker's bag.

Entity A is predominantly a labour hire organisation.

Reasons for decision

Summary

It is considered that the workers subject to this arrangement are not employees of Entity A. Tax is required to be withheld from payments made to them.

Detailed reasoning

Employee or contractor

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from salary, wages, commission, bonuses or allowances you pay to an individual as an 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 principal/independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

In determining the nature of the contractual relationship, it is important to consider all the terms and conditions of the contract between the parties whether express or implied, in light of the circumstances surrounding the making of the contract.

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

These indicators include:

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

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

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

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

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

· which party provides tools, equipment and payment of business expenses.

Control

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

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

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

Organisation or integration

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

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

Results

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

'The production of a given result' means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

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

In contracts to produce a result, payment is often made for a negotiated contract price, as opposed to an hourly rate. 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. In Hollis v. Vabu (2001) 207 CLR 21; 2000 ATC 4508; (2001) 47 ATR 559 (Hollis v. Vabu) the High Court considered that payment to bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Further, the Full Court of the Supreme Court of South Australia in Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd [2004] SASC 288; 2004 ATC 4933; (2004) 57 ATR 147, found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

Delegation

The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contactor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee.

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

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

Risk

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

Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor.

Commonly, an independent contractor or entity would solely bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense.

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

Provision of own tools and equipment and payment of business expenses

The provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

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

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

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

Other indicators

In addition to the above, other indicators of the nature of the contractual relationship have been stated. Those 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 and the provision of other benefits prescribed under an award for employees. However, the fact that a contract does not contain provisions for annual and sick leave will not, in itself, be an indicator of a principal/independent contractor relationship.

The requirement that a worker wear a company uniform is an indicator of an employment relationship existing between the contracting parties. In Hollis v. Vabu, the fact that the couriers were presented to the public and to those using the courier service as emanations of Vabu (the couriers were wearing uniforms bearing Vabu's logo) was an important factor supporting the majority's decision that the bicycle couriers were employees.

Application to workers engaged to provide services to Entity B

After examining the information contained in the application, it is considered that the workers engaged to provide services to Entity B are not Entity A's employees as:

(a) Entity A does not have sufficient control over the workers. The workers arrange with Entity B as to when they will provide their services. It is Entity B who controls where and when those services will be provided - that is, which clients will be visited and at what time.

(b) The workers wear a uniform and use stationery branded with Entity B's name. Therefore, they will be perceived by the public as representing Entity B's business and not that of Entity A, and

(c) Any goodwill generated by the worker's will attach itself to Entity B and not Entity A.

As the workers are not employees of Entity A, it is considered that they are independent contractors.

LABOUR HIRE WITHHOLDING OBLIGATIONS

Section 12-60 to Schedule 1 of the TAA requires an entity which operates a labour hire business to withhold amounts from payments made to individuals under a labour hire arrangement.

An entity operates a labour hire firm if:

· they arrange for workers to perform work or services directly for clients

· the client pays the entity for this service

· the entity pays the worker for work performed for, or services provided to, the client, and

· the worker is not an employee of the client.

As Entity A is predominantly a labour hire organisation, any payments Entity A makes in relation to this arrangement must have tax withheld from them.