Edited version of your written advice

Authorisation Number: 1012786799406

Advice

Question 1

Are Workers considered to be employees of a Principal under subsection 12(1) or 12(3) of the Superannuation Guarantee Administration Act 1992 (SGAA) and therefore required to make superannuation guarantee payments?

Advice

No.

Relevant facts and circumstances

The Principal contracts with Workers (who usually have their own ABN) to provide services for other customers. The Workers can advertise their offering of services to the general public but they do not have to advertise that they are contracting to the Principal. They also are not required to wear uniforms or display the Principal's signage.

In most instances the customers are sourced by the customer contacting the Principal who then seeks a possible placement with a Worker. The Worker can also source the customers themselves and then formalise the arrangement with the Principal. The Worker has the right to refuse to provide services.

The Worker is also able to work for other Principals, as long as there are no conflicts of interest. Customers are able to change Principals if they like and remain with the same Worker.

The Principal requires the Worker to meet certain standards. The Workers must inform the Principal if for any reason they are unable to provide services for a particular day. The Worker has the right to delegate as long as the replacement is approved in writing by the Principal and also meets certain requirements obtaining to National Guidelines.

The Worker can set their own fees but are bound to charge within a set range by the Principal. All record keeping and privacy policies must be adhered to. The record keeping is required in order for the Principal to meet its legal reporting obligations under National Guidelines.

All costs of providing resources are paid for by the Worker. The Worker also pays for maintaining their own licenses and registrations. The Worker is required to pay for their own insurance, (public liability and workcover). They are not reimbursed by the Principal. Workers set their own daily curriculum and are not directed on how this should be performed. The Worker is not entitled to any annual leave, or personal leave entitlements.

Reasons for Decision

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 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 is a common law employer and employee relationship, or whether the workers meet the expanded definition of employee under subsection 12(3) of the SGAA.

Summary

The Workers, when engaged by the Principal, are not considered to be common law employees as defined in subsection 12(1) of the SGAA, for the period 1 July 2014 to 30 June 2018 inclusively. The workers also do not meet the expanded definition of employee under subsection 12(3) of the SGAA.

Detailed reasoning

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).

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 of the common law to your case:

In this case, the Principal enters into a contract with the customers for the Worker to provide services. The Principal enters into a contractual arrangement with the Worker to provide the service and forwards the payment from the customer to the Worker.

The Workers own the property rights of material they develop as part of providing their services and customers are able to move their services from Principal to remain with the Worker if they are comfortable with that Worker. Workers are also free to work with other Principals.

The Worker does not receive any entitlements such as annual or sick leave.

Based on the information provided, the terms of engagement test in isolation is more in favour of the notion that the relationship between the Principal and the Worker is one of principal and independent contractor.

2. Control

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.

Paragraphs 36 and 37 of SGR 2005/1 provide that while control is important, it is not the sole indicator of whether or not a relationship is one of employment. The approach of the Courts has been to regard it as one of a number of indicia which must be considered in determination of that question.

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.

Application of the common law to your case:

As advised in the terms of the contract, the industry is heavily regulated; ensuring quality of services meet the overall quality required by the National Law.

Therefore the fact that Workers are required to keep records which relates to the Principal's obligations under the National Law is not a result of control which is enforced by the Principal, but in fact is governed by legislation determined by an external body of which all Workers in the industry must adhere to.

In this case the Worker is not subject to any direction or control by Principal on how they provide their services, except for complying with obligations contained in the Worker Agreement which is related to the Principal's obligations to comply with the National Law. Workers are free to set their own fees for the services within the range outlined by the Principal, can refuse to provide services for a customer introduced by the Principal for any reason and can delegate its work to another person. There is also no restraint of trade covering the Worker such that they can work for another Principal.

The Principal acts as a co-ordinator, ensuring that the services provided by a Worker comply with the National Law. The laws require that the Principal be paid directly by the customer for the services. In this way the Principal acts as an administrator for the Worker. The Principal does not act as an employer of a Worker who requires the Worker to perform duties for the Principal as and when it requires. Ultimately the Worker decides whether they will work under the Agreement since they can refuse to provide services for any reason and they have total freedom in determining how the services are provided. The control test in isolation is more in favour of the notion that the relationship between the Principal and Worker is 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.

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. The worker needs to be running their own business or enterprise and have independence in the conduct of their operations.

In Montreal v. Montreal Locomotive Works [1947] 1 DLR 161, Lord Wright said:

...it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior.

Similarly, in Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans [1952] 1 TLR 101 Denning LJ said:

...under a contract of service, a man is employed as part of the business, and his work is done as a integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

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.

This was highlighted in Hollis v. Vabu Pty Ltd at paragraph 48, where the court said in relation to bicycle couriers hired by Vabu:

The couriers were not providing skilled labour or labour which required special qualifications. A bicycle courier is unable to make an independent career as a free-lancer or to generate any 'goodwill' as a bicycle courier…

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.

It is therefore necessary to consider whether the worker is providing services as part of the principal's business (under a contract of service as an employee) or providing services as part of their own business (under a contract for services as an independent contractor).

Application of the common law to your case:

In your case, the Workers can operate separately from the Principal. They are not required to advertise that they contracted with the Principal and can source customers themselves to provide services under the arrangement they have with the Principal. The Workers do not have Principal signage displayed or wear their uniforms. The Workers also decide how the services should be performed. Workers are not integrated into the Principal's business as they operate their own business. Most Workers have their own ABN and the worker is expected to generate goodwill in their own right. The benefits from the creation of goodwill flow to the worker rather than the principal. This is evidenced by the fact that if the Worker decides to change Principal, they are allowed to take former customers of the Principal to the new Principal.

Overall, the integration test in isolation is more in favour of the notion that the relationship between the Principal and the Worker is one of principal and independent contractors.

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 of the common law to your case:

Even though the Workers are paid an hourly rate, it is at a rate stipulated by the Worker (within a range specified by Principal). The Workers are paid to achieve a result of providing services on the days and times required by customers who have an agreement with the Principal. Workers are only paid when they provide the services as required. If they don't provide this deliverable service, they don't get paid their fees under the Agreement.

Overall, the results test in isolation is more in favour of the notion that the relationship between the Principal and the Worker is 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.

If the contract leaves the contractor free to do the work himself or employ other persons to carry it out the contractual remuneration when paid is not a payment made wholly or at all for the labour of the person to whom the payments are made. It is a payment made under a contract whereby the contractor has undertaken to produce a result...

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.

However, a clause in the contract may permit the worker to delegate the task to another worker subject to approval of the principal, as the principal may not want an unknown worker to be working on their site or who may not be suitably qualified.

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.

Therefore, under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). A person who has a right to delegate work (whether or not that right is exercised in practice) does not work under a contract wholly or principally for their labour. Unless the contract expressly requires the service provider to personally perform the contracted services, the contractor is free to arrange for his or her employees to perform all or some of the work or may subcontract all or some of the work to another service provider.

Application of the common law to your case:

The Agreement stipulates that the Workers can delegate with the express written consent of the Principal. Generally delegation does not occur because of the nature of the service, but the Worker is provided with an option to delegate. When this occurs, the Worker is responsible for remunerating the replacement worker / service provider.

Overall, the delegation test in isolation is more in favour of the notion that the relationship between the Principal and the Workers is one of principal and independent contractor.

6. Risk

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees. However 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.

As stated by McKenna J in Ready Mixed Concrete (South East) Limited v. Minister Pensions and National Insurance [1968] 2 QB 497 at 526:

…the owner of assets, the chance of profit and risk of loss in the business of carriage are his and not the company's.

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.

Carrying their own insurance and indemnity policies is an indicator that a worker is engaged as an independent contractor.

Application of the common law to your case:

The Agreement provides that the Worker is liable for, and indemnifies the Principal from any loss.

In this case the Workers bear all commercial risk whilst doing their activities under the Agreement. This is because the Agreement requires a Worker to provide a large amount of resources at their own expense. This includes the cost of making sure the location where the work is performed meet the standards of the National Law. They also bear the general everyday costs of providing the services (eg, equipment costs). A Worker cannot claim these costs from the Principal and bears the risk that the fees received will not cover these costs. A customer may leave a Worker (this can include where they are suspended for non-payment) in which case the Worker receives no fees in relation to the services.

A Worker is also required to take out various insurances to cover its services. This includes workplace injury insurance, personal injury insurance, public liability insurance, professional indemnity insurance, motor vehicle insurance and workers compensation insurance (Workcover).

Overall, the risk test in isolation is more in favour of the notion that the relationship between the Principal and the Worker is one of principal and independent contractors.

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 his 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 of the common law to your case:

In this case, under the Agreement, Workers must provide a significant amount of resources, at their own cost to provide services. Additionally Workers must maintain at their own cost, all licences and accreditation needed to provide services. Workers are not reimbursed for any of these expenses by the Principal.

Therefore the capital test in isolation is more in favour of the notion that the relationship between the Principal and the Worker is one of principal and independent contractors.

Conclusion

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