Edited version of your written advice

Authorisation Number: 1012711643628

Advice

Subject: Status of a worker/payee - superannuation guarantee liability.

Question 1

Was the worker your common law employee as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period 1 July 20XX to 30 September 20YY?

Advice

No, the worker is not your common law employee. Refer to 'why we have made this decision'

Question 2

Was the worker your employee by virtue of subsection 12(3) of the SGAA?

Advice

No, the worker is not your employee by virtue of subsection 12(3) of the SGAA. Refer to 'why we have made this decision'

This advice applies for the following period

1 July 20XX to 30 September 20YY

The arrangement commences on

1 July 20XX

We considered these to be the relevant facts and evidence

• You completed a Superannuation guarantee: status of the worker questionnaire and provided it on dd/mm/yyyy.

• Your worker completed a Superannuation guarantee: status of the worker questionnaire and provided it on dd/mm/yyyy.

We formed our view on the facts by relying on this information

• PQ dated dd/mm/yyyy

• WQ dated dd/mm/yyyy

• Record of conversation

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

We considered the following case law

Bowerman v. Sinclair Halvorsen Pty Ltd [1999] NSWIRComm 21

Commissioner of State Taxation v. Roy Morgan Research Centre Pty Ltd (2004) SASC 288

Curtis v. The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17

Neale (DFC of T) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419

Insurance [1968] 2 QB 497

Stevens v. Brodribb ((1986) 160 CLR 16

World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327

We followed these ATO view documents

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

Reasons for decision

Why we have made this decision

Summary

The facts and evidence show that the worker is not an employee for the purposes of the SGAA under either the common law definition or the expanded definition as set out in subsection 12(3) of the SGAA.

Therefore you do not have an obligation to pay superannuation contributions on behalf of the worker.

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.

Question 1

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.

1. Terms of engagement

The fundamental task with respect to the terms of engagement test is to determine the nature of the contract between the parties. For this test, we must determine the nature of the contract between the parties. We will consider whether the contract is written or verbal and whether the terms and conditions are express or implied. These factors are important in characterising the relationship between the parties.

It might be argued that the parties' intention in forming a contract is not subjective, but an objective one; that is, the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Isaacs J in Curtis v. The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17:

Where parties enter into a bargain with one another whereby certain rights and obligations are created, they cannot by a mere consensual label alter the inherent character of the relations they have actually called into existence. Many cases have arisen where Courts have disregarded such labels, because in law they were wrong, and have looked beneath them to the real substance.

Therefore, 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 Hollis v. Vabu Pty Ltd (2001) 207 CLR 21 (Hollis v. Vabu Pty Ltd) it was noted that although no payments of annual leave or sick leave were given, and no superannuation deductions were made by Vabu in respect of the bicycle couriers, the relationship between the parties was found not merely from these contractual terms. The system which was operated under and the work practices imposed by Vabu went to establishing 'the totality of the relationship' between the parties and it is this which is to be considered.

Application to your case:

You advised that a working relationship was established on the basis of the worker approaching you regarding their services.

Following this, you entered into a verbal agreement for the worker to provide services on the following basis:

• the worker was engaged to provide services

• the worker could negotiate their rate of pay and conditions

• you could stop using their services without notice

• none of your workers were engaged on a similar basis.

Conversely, the worker claims that they were not able to renegotiate their rate of pay and conditions.

The worker advised that:

• there was no written contract formed

• they were not sure if the Principal could dismiss or terminate their services.

In summary you and the worker agree that no written agreement was formed for drafting services. The worker was to be remunerated on a commission basis payable after the formation of a building contract between the Principal and their clients, and in particular on the completion of slabs. The agreement for drafting services and the associated remuneration inclusive of commission payments appear to be the sole focus of the terms of the agreement. No evidence was provided that a job advertisement was placed, or working conditions discussed such as working hours, holidays, or sick leave.

On balance, the actions of the parties do not appear to indicate an intention to form an employer/employee relationship but rather an agreement for services.

Although both contractors and employees may be engaged on the basis of one party approaching the other to enter a working relationship, in this case each party could reasonably conclude from the actions of the other that an employer/employee relationship was not intended.

Overall, we are satisfied that the terms of engagement test in isolation is more in favour of the notion that the relationship between you and the worker was one of principal and independent contractor.

However, to determine the true nature of the relationship, it is necessary to consider other common law tests.

2. Control

Even though the modern approach to defining the contractual relationship is to have regard to the totality of the relationship between the parties, control is still an important factor to be considered. This was recognised by Wilson and Dawson JJ in Stevens v. Brodribb ((1986) 160 CLR 16 at 36) (Stevens v. Brodribb), where they state:

In many, if not most cases, it is still appropriate to apply the control test in the first instance because it remains the surest guide to whether a person is contracting independently or serving as an employee.

The extent to which the employer 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 lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it.

The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. A high degree of direction and control is common in contracts for services because the payer has the right to specify in the contract how the services are to be performed. Similarly, the right to supervise how the work is to be performed does not constitute a contract of service where the essence is one of independent contractor.

Application to your case:

You advised that:

• you did not provide training to the worker

• the worker chose their own hours

• the worker was not required to attend meetings within your business or with your clients

• paid breaks were not provided

• you did not schedule jobs for the worker

• you provided no direction as to where the jobs were to be performed

• you did not supervise the worker

• the worker was able to refuse jobs

• the worker did not have to seek permission nor provide notice to take time off.

The worker stated that:

• no training was provided by you

• they worked daily varying hours for you

• they regularly attended meetings with both your staff and clients to discuss current and future projects

• they were allowed breaks, but this was included in their remuneration arrangement

• you allocated clients/ projects and that the priority of tasks was jointly determined

• half of meetings were conducted at your client's office and the remainder at either the worker's own home or the client's premises

• you reviewed their work at key stages

• tasks could not be refused

• they did not have to ask for your permission to have time off, but they needed to provide prior notice

• if they were away, your staff did some of their work

The evidence provided by you and the worker are contradictory in terms of supervision, task refusal, and seeking permission to have time off. Though there is some agreement between you and the worker in that no training was provided, and the worker set their own hours.

In effect an agreement was formed for services to be provided by the worker in essentially their own timeframe. They attended meetings with you, your clients and other contractors you had engaged, and discussed scheduling requirements which would be a normal expectation. The working arrangement operated without any written agreement and no evidence was provided that any verbal agreement was reached in respect of how the services were to be performed. It appears the worker was free to perform the work in a manner they saw fit, and based on the available evidence, you did not appear to exert any significant control.

Overall, we are satisfied that the control test in isolation is more in favour of the notion that the relationship between you and the worker was one of principal and independent contractor.

3. Integration

Another significant factor in establishing the nature of a contractual relationship at common law is to determine whether the worker's services are an integral part of the employer's business (under a contract of service as an employee) or providing services as an individual carrying on his or her own business (under a contract for services as an independent contractor). This is known as the 'integration' test.

If the worker's services are an integral and essential part of the employer's business that engages them, 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, they are an independent contractor.

The professional skills involved in carrying out the work are also a useful guide in determining whether a person is carrying on their own business or not. The provision of professional skills or skilled labour may imply that the contractor is able to make an independent career by selling that skill. In the case of a contractor with an independent career, it may be implied that the contractor is able to conduct their own business using those skills.

Consideration may also be given to whether the worker could be expected to generate goodwill in their own right. If the benefits from the creation of goodwill flow to the worker then this would indicate that they are an independent contractor. Alternatively, if goodwill flows to the principal, this suggests an employer/employee relationship.

Application to your case:

You stated that:

• the worker operated their own business

• was able to use other contractors to complete jobs

• was provided with no training by you

• did not hold any supervisory or assessment roles in respect of your business

• the worker was not required to promote your business name or logo

• had their own business promotional items

• was not required to advertise your business on their assets.

• the ratio of leads generated by your business to leads generated by their business were 60:40.

This contrasts with the worker's statements:

• they wore clothing with your logo

• you provided them with business cards bearing your logo

• they do not have a business card or clothing promoting their own business.

Based on the available evidence, it is apparent that the worker was not required to work exclusively for you. However on the occasions when they were working with your clients they were being held out as being a representative of your business. Their work appears to be integral to your business, not only for the actual work performed, but to assist in the boosting your businesses image. The business cards you provided them identified them as part of your management team, and did not in any way identify them as an independent business owner.

While we acknowledge that it's clear the worker at some time in the past operated their own independent business, this does not exclude them from being your employee during the period under review. However, it does show they had the knowledge and experience of a business person.

On balance, we consider that the integration test in isolation is more in favour of the notion that the relationship between you and the worker was one of employer and employee.

4. 'Results' test

Under a results based contract, payment is often made for a negotiated contract price, as opposed to an hourly rate. 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.

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. In World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327 (World Book (Australia) Pty Ltd v. FC of T) 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.

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. For example, the Full Court of the Supreme Court of South Australia in the decision of Commissioner of State Taxation v. Roy Morgan Research Centre Pty Ltd (2004) SASC 288 (Commissioner of State Taxation v. Roy Morgan Research Centre Pty Ltd), found that interviewers who were only paid on the completion of each assignment not on an hourly basis, were employees and not independent contractors. It was found that the workers were paid for their time spent and labour, and not to produce a result.

Having regard to the true essence of the contract, the manner in which 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. Generally, where a worker submits quotes or issues invoices for each job to the principal, this would be consistent with operating their own business. Nonetheless, the issuing of invoices is not necessarily determinative of the nature of the relationship.

Accordingly, the contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties.

Application to your case:

You stated that:

• the worker invoiced for services based on fees which they had set

• the worker charged goods and services tax (GST) on their invoices

Your TAG stated:

• the worker provided services to both your clients and their own.

The worker stated that:

• they invoiced you for payment, but payment was not dependent on the completion of tasks.

As stated in SGR 2005/1:

If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

Accordingly, we are satisfied that the results test in isolation is more in favour of the notion that the relationship between you and the worker was one of principal and independent contractor.

5. Delegation

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.

If the contract does not expressly require the worker to personally perform the services, an independent contractor has the capacity to delegate or subcontract all (or some) of the work to others. Where the worker delegates, they are responsible for remunerating that worker.

In the case of Neale (DFC of T) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419 at 425; 6 AITR 201 at 202, the High Court interpreted the words 'a contract which is wholly or substantially for the labour of the person to whom the payments are made' to decide that if a contract leaves a person completely free, if he or she chooses, to engage others to perform the work on his or her behalf means that the payments are not payments under a contract for labour. That is so even if the contractor actually does perform the work personally and had no intention of doing otherwise.

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 the case of Bowerman v. Sinclair Halvorsen Pty Ltd [1999] NSWIRComm 21, Bishop J said:

The fact that any substitute driver had to be approved by the company does not give the respondent [the principal] control over that delegation… the company surely had the right to be confident that any substitute driver was competent to do the job and maintain the "integrity" of the company as Mr Coomb put it.

Application to your case:

You stated:

• you did not give instructions to the worker for them to complete the work personally

• the worker arranged for their work to be completed when they were absent

• the worker could arrange for their work to be completed by persons other than your employees.

Your TAG stated:

• when the worker was on leave or sick leave they could arrange for a substitute to perform their work

• the substitute was not your employee, but another contractor engaged by you

• any sharing of the payments for services were a matter to be negotiated between the worker and your other contractors.

Your worker stated:

• you had not given specific instructions to complete the work personally

• it was you who arranged for work to be done when they were sick or on went on holidays.

Both you and the worker agree that the concept of delegation was not discussed. However in practice, it appears that the on some occasions another contractor completed some of the worker's tasks. The evidence provided was contradictory in terms of which party made these arrangements inclusive of payments.

In these circumstances we consider the delegation test in isolation to be neutral.

6. 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.

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.

Application to your case:

You advised that the worker :

• was responsible for their own insurances

• had to meet the costs of correcting mistakes.

The worker advised:

• that neither party was responsible for insurances

• they were not required to guarantee their work for any period of time, and

• they did not have to correct their work in their own time or pay for any mistakes.

Both the Principal and the worker are exposed to some degree of reputational and commercial risk. The extent of those risks are difficult to determine on the basis of the evidence provided.

We consider the risk test in isolation to be neutral.

7. Capital - Provision of tools and equipment and payment of business expenses

A worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for 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 will seek separate payment for such expenses from the principal.

In Stevens v. Brodribb at 36-37, the High Court observed that working on one's own account (as an independent contractor) often involves:

The provision of him by his own place of work or of his equipment, the creation of him of goodwill or saleable assets in the course of his work, the payment by him from his remuneration of business expenses of any significant proportion…

Application to your case:

You advised that:

• the worker provided their own assets to complete their work

• through your TAG , that you provided some clothing to the worker.

The worker confirmed that:

• they provided assets in the form of a car, mobile phone and a laptop

• they were not reimbursed by you for any assets, equipment or tools.

Although substantial assets were not required in delivery of the services, it was the worker who funded the main essential assets in the form of a laptop, application software and a vehicle, and bore the majority of business expenses, such as the running costs of his vehicle, printing, telephone and so on.

Overall, we are satisfied that the 'capital - provision of tools and equipment and payment of business expenses' test in isolation is more in favour of the notion that the relationship between you and the worker was one of principal and independent contractor.

Summary - common law

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 worker was not your common law employee.

This is because the worker was contracted for services and was free to perform the work in a manner that he saw fit. The worker was paid on a results basis, funded the assets required, paid for their expenses and was exposed to commercial loss or the chance to make a profit.

As the facts and evidence indicate that worker was not your employee under common law, we are required to consider the expanded definition of employee under subsection 12(3) of the SGAA.

Question 2

Were the workers your employees by virtue of subsection 12(3) of the SGAA?

Expanded definition of employee for SGAA purposes

The expanded definition of employee within subsection 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.

Paragraph 78 of SGR 2005/1 states that where the terms of the contract, in light of the subsequent conduct of the parties, indicate that:

• 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.

The contract is considered to be wholly and principally for the labour of the individual engaged, and he or she will be an employee under subsection 12(3) of the SGAA.

Wholly or principally for labour

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.

Based on the available facts and evidence, we considered that the delegation test was neutral and as such we are unable to conclude that the worker was paid primarily for their own labour and skills.

The individual must perform the duties themselves

Both you and the worker agree that specific instructions were not given about whether the worker was to complete the work personally. Again, on the basis that the delegation test was neutral, we are unable to conclude that the worker was to perform the duties themselves.

Not paid to achieve a result

As discussed earlier, under the 'results' test, we consider that the facts and evidence show that the worker was paid to achieve a result.

Our conclusion regarding the expanded definition of employee

Accordingly, as the worker does not satisfy all three components of the expanded definition under subsection 12(3) of the SGAA, the worker does not meet the expanded definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

Upon considering of all the available facts and evidence, the Commissioner is satisfied that with respect to work performed for you, the worker does not meet the definition of an employee for the purposes of the SGAA under either the common law definition or the expanded definition provided under subsection 12(3) of the SGAA. Accordingly you did not have an obligation to pay superannuation contributions for the benefit of the worker under the SGAA.