Edited version of administratively binding advice

Authorisation Number: 1012603014935

Advice

Subject: Superannuation guarantee - status of the worker

Question

Were the Workers considered employees either under common law or under subsection 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

Yes. Refer to 'Reasons for decision'

The arrangement commences on:

After 1 January 2012

Relevant facts and circumstances

You engaged workers, initially on a short term basis and with no written contract to provide services to you.

Relevant legislative provisions

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

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

We followed these ATO view documents:

Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee?

Reasons for decision

Summary

The facts and evidence suggest that the Workers were not your employees for the purposes of the SGAA under both the common law definition and the expanded definition as set out in subsection 12(3) of the SGAA. You therefore had an obligation to pay superannuation contributions on behalf of the Workers.

Detailed reasoning

The SGAA states that an employer must provide the required minimum level of superannuation support for its employees (unless the employees are exempt employees) or pay the Superannuation Guarantee Charge (SGC).

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

Therefore, it is necessary to consider not only whether there is a common law relationship of employer/employee between the parties, but also, if the common law test is not met or is inconclusive, whether the expanded definition of 'employee' in subsection 12(3) of the SGAA applies. If a worker is not an employee under subsections 12(1) or 12(3) of the SGAA, their status is described as an independent contractor and there is no SG obligation.

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

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

Common law employee

The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to produce the contracted result in return for an agreed payment, whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts. As a result, a substantial and well-established body of case law has developed on the issue. Consideration should be given to the various indicators identified in judicial decisions. No list of factors is to be regarded as exhaustive and the weight to be given to particular facts will vary according to the circumstances. The totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or independent contractor.

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

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).

SGR 2005/1 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 this case

Although you have advised that no formal written contract was formed, the intention of the parties is clear. Notwithstanding the lack of a formal contract, it appears that an agreement was formed on the basis of the duties.

It was the initial intention of the parties that the Workers be engaged as short term contractors, with no amounts being withheld for tax, or any provisions made for superannuation liabilities.

Other elements of engagement such as the fixed fortnightly compensation and the attempt to define hours of work are indicative of an employer /employee engagement.

The ''terms of engagement' test in isolation is inconclusive as to the type or relationship.

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 this case

The workers agreed to a list of duties to be performed and on preferable hours to be worked.

It appears that one of the workers was engaged on the basis of their professional skills and as such a high degree of supervision from the Principal would not be expected. It is considered that the Principal had the right to control both the range and the manner in which the work was done.

Overall, we are satisfied that the control test in isolation is more in favour of the notion that the relationship between the Principal and the Workers was one of employer and employees.

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

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 this case

There was no business associated with the Principal and as such the Worker's services could not form an integral part of the Principal's business. Consequently this part of the test is irrelevant.

The Workers were engaged to perform a range of services which effectively amounted to full time positions. The Principal was able to dictate what duties were to be performed and the Workers generally used assets funded by the Principal. The nature of the engagement was such that the Workers had little chance to work for other parties. No supportive evidence was provided that the Workers were carrying on their own business.

Notwithstanding the irrelevance of part of this test as detailed above, we are satisfied that the test in isolation is more in favour of the notion that the relationship between the Principal and the Workers was one of employer and employee.

'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 this case

The Workers were remunerated on a fortnightly basis in contrast to receiving a fixed sum on completion of a particular job. Although the Workers were engaged as short term contractors their engagement was extended for longer than originally anticipated.

The Workers did not issue invoices for jobs completed. The Workers were in effect being paid for their labour rather than to produce a result.

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 Workers was one of one of employer and employee.

Whether the work can be delegated or subcontracted

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.

When an employee asks a colleague to take an additional shift or responsibility, the employee is not responsible for paying that replacement worker; rather the employee has merely substituted or shared the workload.

In this case

You have advised that the workers could delegate their tasks to others and you understood some reallocation of compensation was done. Additionally, hours to be worked were set by the Workers amongst themselves in order to cover the work needed to do the job.

No evidence was provided that the Workers were left completely free to engage others to perform the work on their behalf.

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 Workers was one of one of employer and employee.

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.

The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit), the more they are likely to be regarded as being independent. Typically, a worker who derives piece rate payments and sustains large outgoings would be so exposed. The higher the proportion of the gross income of the worker which is required to be expended in deriving that income, and the more substantial the assets which the worker brings to the tasks, the more likely that the contract is for service, or a contract with an independent contractor.

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 this case

You have advised that the Principal had comprehensive insurances which included workers compensation. No evidence was provided in respect of what insurance cover was held by the Workers. The workers remuneration was essentially fixed and they did not appear to have sustained large outgoings.

The Workers were exposed to risk as for workers generally, they could be held liable for personal injury or property damage. It is not known if the Workers had appropriate public liability insurance in place.

The 'risk' test in isolation is inconclusive as to the type or relationship.

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 this case

These assets were used by the Workers in completing their duties were provided by the Principal. Evidence was provided that the Workers incurred some marginal expenditure. Effectively the cost of any expenses, incurred by the Workers in completing their duties, was not required to be factored into their remuneration rates.

Overall, we are satisfied that the '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 Workers was one of one of employer and employee.

Summary - common law

The Principal engaged the Workers for the purpose of providing services. The Workers were engaged in their individual capacity rather than through a third party. No formal contract was formed however the intention to engage the Workers as short term contractors was evident from email exchanges. This intention was examined in the light of actual operation of the Workers.

The Workers were not closely supervised, nor would it be expected in the context of this type of work. The Principal did not run a business and the emphasis was on working rather than achieving a particular result. The Workers had no right to delegate or subcontract. There is some doubt about the level of risk to which the Workers were exposed. The Workers had access to a petty cash float for day-to-day expenses and only incurred marginal expenses.

In summary and under subsection 12(1) of the SGAA, when looking at the relationship as a whole, the facts and evidence provided indicate that the relationship between the Principal and the Workers was one of employer and employee.

Employee under subsection 12(3) of the SGAA

The Commissioner's 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 workers were your employees under common law, we are not required to consider the expanded definition under subsection 12(3) of the SGAA. However, in order to leave no doubt as to our view in this matter, the expanded definition has also been considered and is discussed below.

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.

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.

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.

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 this case

Wholly or principally for labour

Although no formal contact was formed nor invoices issued, emails show that the agreement between the parties was based on the provision of labour for regular compensation, rather than supply of goods or materials. Furthermore, expenses were met out of the Principal's petty cash float

Based on the available facts and evidence, we consider that the Workers were paid primarily for their own labour and skills.

The individual must perform the duties themselves

As discussed earlier under the heading 'Whether the work can be delegated or subcontracted', we consider that the facts and evidence indicate that the Workers did not have the right to delegate work to others.

Not paid to achieve a result

As discussed earlier under the heading, 'Results contracts', we consider that the facts and evidence indicate that the Worker was not paid for a result.

Accordingly, it is considered that the contract between the Principal and the Workers was wholly or principally for their labour under the expanded definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion

Upon considering all the available facts and evidence we are satisfied the Workers were your employees under both common law and the expanded definition provided under subsection 12(3) of the SGAA. Accordingly your client had an obligation to pay superannuation guarantee contributions for the benefit of the Workers.