Edited version of private advice

Authorisation Number: 1012647491065

Ruling

Subject: Employee V Contractor

Question 1

Are the sales consultants employees or contractors?

Answer

The sales consultants are contractors.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

The Company will engage sales consultants with a labour hire firm. The following criteria outlines the guidelines and processes that a sales consultant will adopt:

• All consultants will be structured as Pty Ltd companies with business trading names

• All consultants will have at least one or more direct employees and will engage the contract services of other specialised resources.

• The following resources and tools of trade will be provided by the sales consultant:

• Own vehicle;

• Own mobile phone and communication devices;

• Print and provide own business cards;

• Payments to the sales consultant will be a set commission structure based on a percentage of the total sales contract entered into between the potential client and the Company.

• The sales consultant will be financially responsible for the cost of any items listed on the client contractual documents that are in error.

• The sales consultants have the scope to include items in the contractual documents that are "discounts/giveaways" of which the sales consultant will be financially responsible.

• Sales consultants will attend monthly meetings at the Company's main office to submit any potential client deals that have been prepared, and to get product and guideline updates.

• Sales consultants will control their own customer relations environment, i.e. book their own meetings with clients at a place of choice.

Relevant legislative provisions

Tax Administration Act 1953 Section 12-35.

Reasons for decision

Section 12-35 of the Schedule 1 to the Tax Administration Act 1953 (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 (whether of that or another entity).

The term 'employee' is not defined in the TAA 1953, therefore it has its ordinary meaning. In most cases, it will be self-evident whether an employer/employee or principal/independent contractor relationship exists. However, it is sometimes difficult to discern the true character of the relationship from the facts of the case as the intentions of the parties may be unclear or ambiguous, such as where the terms of the contract are disputed by the parties or are otherwise in apparent conflict. Because of these difficulties, the ordinary meaning of employee has been the subject of a significant amount of judicial consideration.

These cases have discussed a number of factors that may be applied in determining whether an individual is a common law employee.

As the employer-employee relationship is a contractual one it is often referred to as a 'contract of service' which can be contrasted with a principal/independent contractor relationship typically referred to as a 'contract for services'. That is, an independent contractor generally contracts to achieve a result, whereas an employee contracts to provide labour (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, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services.

A determination of whether an individual under a specific arrangement is an employee cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of that individual. It is the totality of the relationship that needs to be considered. 

Taxation Ruling TR 2005/16 Income tax Pay As You Go - withholding from payments to employees at paragraph 7 states:

'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.'

TR 2005/16 discusses the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

• Control test

• Contract for results

• Delegation

• Risk

• Provision of tools/payment of own expenses

• Other - other indicia 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.

Application of the key indicators to your circumstances

Control test

TR 2005/16 states that the degree of control which a person who engages another person can exercise over that person is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. A common law employee is told not only what work is to be done, but how and where it is to be done. However, the mere fact that a contract may specify how the contracted services are to be performed does not necessarily imply an employment relationship.

Paragraph 28 of TR 2005/16 explains further that providing direction is not uncommon in supply contracts. It states:

… a high degree of direction and control is not uncommon in contracts for services.( See Queensland Stations Pty Ltd v. FC of T (1945) 70 CLR 539; (1945) 19 ALJ 253; (1945) 8 ATD 30; [1945] ALR 273 )The payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract; otherwise the contractor is free to exercise their discretion (subject to any terms implied by law). This is because the contractor is working for themselves.

The Company has some control over the sales consultants.

Contract for results

TR 2005/16 states 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 services. Other indicators of a contract for services include where the person is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome, the consideration is for a fixed sum on completion of the specified services which is the result, as opposed to an amount paid by reference to hours worked. 

Payment to the sales consultants will be a set commission structure based on a percentage of the total sales contract entered into between the potential client and the Company.

The sales consultants will have at least one or more direct employees and will engage the contract services of other specialised resources. The sales consultant will provide their own vehicle, own mobile phone/communication devices and office equipment.

Delegation

TR 2005/16 states that 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.

The sales consultants are paid a set commission on the sale of the Company's product and not paid an hourly rate. The sales consultants will be financially responsible for any errors with the sales contract. The emphasis for the sales consultant is on achieving a result.

Risk

TR 2005/16 states that the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor also often carries their own insurance and indemnity policies. 

The sales consultants will be financially responsible for the cost of any items listed on the client contractual documents that are in error. The sales consultants are responsible for workers compensation insurance and public liability insurance and income protections plans for all persons employed by the sales consultant.

Provision of tools/payment of own expenses

TR 2005/16 states 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. Further, the Tax Office considers that an employee, unlike an independent contractor, 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 sales consultants provide the following resources and tools of trade:

• Own vehicle;

• Own mobile phone/communication devices;

• Print and provide own business cards incorporating their business name; and

• Office equipment (furniture, computing etc.) for the display office they are conducting business from.

The sales consultants are responsible for the assets that are used.

Other factors we considered

In addition to the above factors we also considered:

• The sales consultants do not receive any benefits/payments such as annual leave, sick leave, long service leave, or any other benefits under an award for employees as per the contracts provided.

Conclusion

Applying the criteria in TR 2005/16 and from the information provided the sales consultants would be considered to be contractors.