Edited version of private advice

Authorisation Number: 1012633116904

Ruling

Subject: Status of worker - hairdressers

Question

Are your hairdressers employees for the purpose of Section 12-35 of Schedule 1 of the Taxation Administration Act 1953?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You purchased the goodwill of a hair salon. Your business will operate with an employee receptionist, arm's-length hairdressers and one non-arm's length hairdresser, namely, your owner.

The previous owner treated the hairdressers as contractors. The agreement between the workers and the salon owner was/is as follows:

• It is agreed that all contractors receive 50% of their takings for the salon at the end of each week and the salon owner receives the other 50%.

• They supply all of their own hairdressing tools.

• The colour used by the hairdresser is at the expense of the owner of the salon.

• The salon owner does not pay any labour hire for the services of the workers.

• They do not get paid for their holidays or time off.

• They can choose their own hours (they can come and go as they please).

• There are no apprentices taken on as workers. All hairdressers are fully qualified.

• All contractors have their own ABN numbers.

• All contractors do their own taxes and other obligations.

• The salon does not allow for another person to work on their behalf in the event the contractor cannot hair dress for any reason.

• Contractors are able to work out of the salon and do not need permission of the salon owner to do so.

• It is agreed that if in the event the contractors are unable to please their clients or have to rectify any colour work or haircuts it is at their own time and expense.

In addition, you lease the business premises, which is not in a shopping centre but on a road. The arm's-length hairdressers have worked at the salon for a number of years. The clientele received is from bookings from regular clients and new custom generated by word of mouth. There are few walk in customers. Each client is listed in your records as relating to a specific hairdresser. The salon has a price list and the hairdressers charge guided by the salon price list. The takings are paid to the salon owner by the clients. The salon provides the chairs and other major equipment. The salon opens when the first appointment taken and opens until late, dependent on the bookings. The hairdressers have keys to the premises but do not hold any lease rights. The hairdressers cannot sub-contract their work within the salon to avoid sub-contractors attracting business away from your salon. The goodwill of the salon business is highly dependent on the reputation of the hairdressers. You have a website, with a booking form that allows the client to choose the hairdresser (whose names are listed) and has the same prices for each worker and service.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35

Reasons for decision

Summary

Six tests have been regarded by the courts as key indicators of whether an individual is an employee or independent contractor at common law. In your case, we consider your hairdressers are employees when weighing up the six tests because: (i) you ultimately have control of their work due to holding all lease rights to the business premise; (ii) your business branding as a whole is a strong contributor to your business image (along with the reputation of the individual hairdressers); (iii) the hairdressers do not work for a 'result' given they have little or no independence in bargaining a client contract and setting prices; (iv) your hairdressers are unable to sub-contract their work in your salon; (v) your hairdressers do not exclusively bear risk for unsatisfactory performance but, instead, it is a shared risk; and (vi) you, and not the hairdressers, supply most of the required assets and bear most of the business expenses.

Detailed reasoning

Section 12-35 of the Taxation Administration Act 1953 states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Taxation Ruling TR 2005/16 contains the Commissioner's view on whether a person is engaged as an employee or an independent contractor.

Paragraph 7 of TR 2005/16 explains that 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. It follows TR 2005/16 employs six tests that have been regarded by the courts as key indicators of whether an individual is an employee or independent contractor at common law.

Paragraph 21 of TR 2005/16 makes it clear that contractual arrangements that contain clauses that purport to characterise the relationship between the parties as that of principal and independent contractor (and not that of employer and employee) cannot simply deem the relationship between themselves to be something that is not. It follows a worker holding an ABN and contract clauses specifying the worker is to pay the own tax, insurance, etc, will not in themselves determine a contractor relationship or hold any weighting in determining the status of the worker for tax purposes.

The six tests that have been regarded by the courts as key indicators of whether an individual is an employee or independent contractor are:

1. The control test. The classic '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. With 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.

2. The organisation or integration test, concerned with the fundamental question of whether the worker is operating their own business or is operating within the business of the payer. This includes: (i) the nature of the services rendered by the worker; (ii) whether they are an integral part of the business activities carried on by the payer; (iii) whether the worker would be perceived (by a third party) to carry on their own business or enterprise and; (iv) whether the worker could be expected to generate business goodwill in their own right.

3. The results test. The phrase '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.

Where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for the services of an independent contractor. In the Supreme Court of New South Wales case of World Book (Aust) Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4327, Sheller JA said:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor.

For an employee, the basis of payment is: (i) for the time worked, such as paid on an hourly basis; (ii) a price per item or activity (e.g. a fruit picker), particularly when they are not providing major assets to the task (such as a truck owner/driver, who would not be an employee); and (iii) on a commission/percentage basis (e.g. a real estate sales agent). For example, the High Court of Australia, in the case of Federal Commissioner of Taxation v. Barrett & Or 73 ATC 4147, found that land salesmen who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only were employees and not independent contractors.

4. The delegation test is the test to whether the work can be delegated or subcontracted (with or without the approval or consent of the principal). An employee cannot delegate or subcontract work. Where as an independent contractor can delegate or subcontract work.

5. The risk test is the test about whether the worker bears the legal responsibility and expense for the rectification or remedy in the event of unsatisfactory performance. An employee generally does not bear the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance. Where as an independent contractor generally does bear the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

6. The last test is which party provides tools, equipment and payment of business expenses. Unlike an employee, an independent contractor will generally provide tools, equipment and payment of business expenses.

The New Zealand Taxation Review Authority Case U26 (1999), 19 NZTC 9,243 (Case U26) was a borderline case that considered the question of whether workers in a specialised massage parlour were independent contractors or employees. The workers paid the premise owner 30% of their fees paid to them by their clients and a pro-rata amount for advertising. Here, the court determined the workers were independent contractors on the grounds of: (i) a customer attaching himself to the individual services of a particular worker, with the premises merely being used as a conduit to the business of that particular worker; (ii) most clients appeared to identify primarily with a particular worker rather than with the premise business; (iii) the worker provided services in the manner they preferred and set their own prices; and (iv) the nature of these massage parlour services were intensely personal between customer and masseuse, including personal counselling, of a kind which were not the norm in the massage parlour industry in general, where workers were regarded as employees. A salient question was whether there was some type of brand-name associated or built up for the particular parlour so that the customers belonged to the parlour rather than to the individual masseur? It was clear from the evidence that some customers only regard the parlour as premises at which to frequent 'their' lady, where it was not acceptable to the client to be treated by anyone other than his favourite lady. It was reiterated a number of times the outcome of the case was borderline.

In the High Court of Australia case of Federal Commissioner of Taxation v. Barrett & Ors (1973) 129 CLR 395; (1973) 47 ALJR 616; (1973) 2 ALR 65; (1973) 4 ATR 122; (1973) 73 ATC 4147 (Barrett & Ors), it was decided land salesmen, who were remunerated by commission only, were employees. As characteristics of independent contractors, it was acknowledged the land salesmen were free from supervision in a task calling for highly individual qualities, they had a willingness to work at odd hours and their payment by commission itself provided adequate incentive to safeguard the respective commercial interests. However, it was decided the land salesmen were employees because: (i) they were representatives of the payer; (ii) they were required to pay over to the payer all moneys received by them from buyers; (iii) they were required to abide by the code of ethics of the payer; (iv) they were required to complete and submit a questionnaire to the payer after each sale; (v) they were required to follow a quality of service insisted by the payer, namely, visit the land with an intending buyer before a sale is concluded; and (vi) the payer controlled the advertising and the supervision of the form of contracts which the salesmen used.

In your case, we consider the six tests apply as follows:

1. The control test. Here, the hairdressers are highly specialised and attract custom according to their reputation and skills. It follows it is natural you would exercise little, if any, control over how the hairdressers generally do their work. However, as the salon owner, we consider, ultimately, you have the power to exercise control because you are the salon owner and the performance of your business is dependent upon the performance of the hairdressers. Since the hairdressers have no intrinsic rental or lease rights to your business premises, ultimately: (a) they have no independence from you in relation to where they perform their work; and (b) you may dismiss them from your business at your choosing. In addition, you control the pricing, advertising, décor, product offering and additional and expected services at the salon, such as provision of drinks to client and other inducements. It follows the control test weighs in favour of an employee relationship rather than in favour of the independence of a contractor.

2. The organisation or integration test. Here, you purchased a business with highly skilled hairdressers, including your director, who have a continuing relationship with the salon and its reputation. The hairdressers are not free to accept work from the public at large on her or his own account within your salon although they are free to work at another salon or externally. Clients are listed as clients of individual hairdressers, clients make bookings with their preferred hairdresser and hairdressers come to work in salon only when they have a booking. Although it is obvious the goodwill of your salon is highly dependent upon the reputation of the hairdressers and the client relationships they have established, their long term relationship with the salon gives the impression they work as part and parcel of the salon owner's business rather than an individual carrying on business on his or her own account.

Also, the salon has a specific and unique brand image in the market place. In other words, what is marketed is the brand. Unlike in Case U26, your business premises would not be seen as merely a conduit to the business of an individual hairdresser but a brand in itself. Like the case of Barrett & Ors, your employing of a receptionist, your taking of the payments received and your creation of your website and its payment facility give the impression the hairdressers work for your business. It follows, despite the high degree of reputation generated by individual hairdressers, similar to a TV or radio personality that would be an employee, the organisation test weighs in favour of an employee relationship rather than in favour of the independence of a contractor, despite both parties generation generating significant amounts of reputation and goodwill.

3. The results test. Here, the hairdressers set prices within the scope or range of your price list. Unlike in Case U26, the hairdressers cannot independently establish or bargain a contract with the clients to provide specified services with a specified outcome. Instead, the hairdressers must conform to your price list. Further, the hairdressers receive a percentage of a job, similar to how a real estate agent receives a percentage of a real estate sale (which the case of Barrett & Ors determined is an employee characteristic). It follows the results test weighs in favour of an employee relationship rather than in favour of the independence of a contractor.

4. The delegation test. Here, this weighs in favour of an employee relationship rather than in favour of the independence of a contractor because you explicitly do not allow the hairdressers to subcontract.

5. The risk test. Here, although the hairdresser bears risk for unsatisfactory performance, so do the reputation and resources of your business. It follows the risk test has a neutral weighting since both parties bear risk.

6. Tools, equipment and payment of business expenses test. Here, whilst the hairdressers have their small tools, you bear the expense for most of the equipment and payment of business expenses, such as rent. For example, if business is poor, you must continue to pay the rent without any contribution from the hairdressers. Unlike in Case U26, your hairdressers do not contribute to advertising. It follows this last test weighs in favour of an employee relationship rather than in favour of the independence of a contractor.

In conclusion, while your hairdressers appear to be uniquely skilled individuals with high levels of personal repute and client loyalty, the weighing up of the six tests that have been regarded by the courts as key indicators find your hairdressers are employees for tax purposes.