Edited version of your written advice

Authorisation Number: 1012811105818

Advice

Subject: Status of the worker for superannuation guarantee

Question 1

Was the worker considered your common law employee as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)?

Answer

Yes. Refer to 'why we have made this decision'

Question 2

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

Answer

Yes. Refer to 'why we have made this decision'

This advice applies for the following period:

1 July 2007 to 30 June 2010

The arrangement commences on:

1 July 2007

Relevant facts and circumstances

The worker declared that SGR 2005/1 entitled them to have superannuation contributions made on their behalf by the Principal because:

• They entered into a verbal contract with the Principal to provide services for approximately 15-20 hours per week for the period of the agreement.

• They invoiced the Principal weekly for these services.

• Their contract was for wholly and principally their labour.

• While they contracted to other businesses whilst working for the principal, they came and went in accordance with their agreed hours of contract.

The Principal provided copies of invoices, received from the worker in support of their claim for superannuation, for the entire period they provided services to the Principal.

• The weekly invoices show the dates on and the location at which the hours of work were performed for the hourly rate.

• Some invoices indicate that work was undertaken on particular occasions at the worker's home.

• The other invoices for the period of the arrangement show work done at the Principal's premises.

The Principal stated in their request for advice that while the worker was paid an hourly rate, in their view they were an independent contractor engaged to achieve a result. The Principal stated that they relied on the worker's skills and expertise to perform the role.

The Principal completed a Superannuation Guarantee: Status of the worker Principal/ payer questionnaire. With the Principal's permission, we requested that the worker complete a Superannuation Guarantee: Status of the worker worker/ payee questionnaire. These questionnaires provided the following information:

• The Principal engaged the worker by word of mouth.

• The Principal entered into a verbal contract with the worker to obtain services on two days each week at an hourly rate.

• The worker provided the services alone and largely unsupervised by the Principal.

• The bulk of the work was performed in the business premises of the Principal, although the worker could choose to work at their home if it was convenient for them.

• The Principal did not control what work was done; the worker decided what tasks were needed each week.

• The worker suggested that they could refuse tasks if they were outside of the scope of the services they had agreed to provide, but this ability was not tested.

• While the Principal and worker both could terminate the arrangement if they chose, ultimately, the worker stated they were replaced in the role by a family member of the Principal.

• The worker had an ABN and while they provided services to the Principal on regular days each week, they were providing services to other businesses at night and on weekends.

• The information provided by both parties agrees that no specific directions were given in respect of the worker's right to delegate under the verbal agreement.

• The Principal stated that no one else performed the services in the event of an absence of the worker.

• The worker suggested that the Principal may have asked a family member to perform tasks in the event of their absence, however they were seldom absent.

• The information provided by both parties agrees that the worker was not required to guarantee their work for any period of time, however they disagree as to the question of insurances carried by the worker, and whether the worker was required to rectify any mistakes unpaid in their own time.

Personal bank account statements were provided from the worker verifying that they had received payment from the Principal.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

Reasons for decision

Why we have made this decision

Summary

The facts and evidence suggest that the worker was your employee 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 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? 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

Was the worker considered your common law employee as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (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.

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:

The Principal engaged the worker by word of mouth. The Principal and the worker both agree that a verbal contract was entered into between the parties to obtain office administration and book keeping services.

The Principal states that the worker was paid an hourly rate of remuneration and that the worker was engaged to achieve a result. The worker also states that they were paid an hourly rate, and that they were to carry out the usual duties required in an office environment.

This method of recruitment could be utilised in both an employer and employee relationship and a principal and independent contractor relationship. The regular hours performed each week could be considered to be more indicative of an employer and employee relationship.

Therefore based on the information provided, we are satisfied that the terms of engagement test are inconclusive.

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

From the information provided, the worker provided the services alone and largely unsupervised by the Principal, who relied on the worker's skills and expertise. The bulk of the work was performed in the business premises of the Principal, although the worker could choose to work in their home if it was convenient for them.

The Principal did not control what work was done the worker decided what tasks were needed each week. The worker could refuse work if it was outside of the scope of the services they had agreed to provide, but this was ability was not tested. The Principal and worker agree that both parties could terminate the arrangement if they chose. This is indicative that the Principal had a right to exercise control over a skilled staff member, performing regular specialised duties if largely unsupervised.

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 employer and skilled employee.

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:

The worker performed the majority of the services at the Principal's place of business.

The worker had an ABN and was known to be providing similar services to other businesses.

Both parties agree that the worker did not advertise or carry any items that would promote their business services to others whilst working within the Principal's premises.

We have received no evidence that the worker actively advertised their services to the public in fact in this case the worker has relied instead on word of mouth recommendations.

Overall, we are satisfied 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 skilled 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 of the common law to your case:

You have contended in your advice request that while the worker was paid an hourly rate, they were engaged to achieve a result.

It is clear from the information provided that the worker in performing their skilled role for the Principal was required to undertake work as agreed. However, the invoices provided indicate that the basis upon which the worker was paid was crucially the number of hours in which they had performed work for the Principal, and not on the completion of specific tasks or particular projects.

Overall, 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 employer and employee.

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 information provided by both parties agrees that no specific directions were given in respect of the worker's right to delegate under the verbal agreement between the Principal and worker.

However the Principal advises that no one else performed the services in the event of an absence of the worker, who did not have any employees or contractors of their own.

The worker suggested in their responses that the Principal may have asked others to perform work in the event of the worker's absence. Additionally as the worker was paid to perform work at an hourly rate while effectively integrated in the business of the Principal it is likely that the worker was required to perform the work personally, rather than bear any liability for the remuneration of a substitute worker.

Overall, we are satisfied that the delegation test in isolation is more in favour of the notion that the relationship between you and the worker was one of employer and employee.

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 information provided by both parties agrees that the worker was not required to guarantee their work for any period of time, however they disagree as to the question of insurances carried by the worker, and whether the worker was required to rectify any mistakes unpaid in their own time.

As the worker was paid an hourly rate for doing regular work for the Principal rather than being paid for a specific result, it is less likely that the worker would have borne the liability for rectifying any minor mistakes that may have occurred during a day they were working at the Principal's business premises.

However the Principal may have been able to pursue the worker for major errors which for example led to the Principal incurring penalties from legal infractions arising from the worker's negligence in performing their skilled role. There has been no suggestion that this has ever occurred.

Overall, we are satisfied that the risk test in isolation was inconclusive.

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:

While the Principal contended that they did not provide the equipment and materials needed by the worker to perform the services conducted in the Principal's business premises effectively the Principal did supply the majority of any materials and equipment.

A worker's invoice provided by the Principal contains a line item of reimbursement. The nature of the work indicates that the worker did not invest any significant capital into their own or the Principal's business.

Overall, we are satisfied that the capital test in isolation is more in favour of the notion that the relationship between you and the worker was one of employer and employee.

Our conclusion regarding the common law definition of employee

With respect to the relationship between you and the worker, the facts and evidence provided points in five of the seven tests to the conclusion that the worker was a common law employee of the principal. The other two tests were inconclusive.

As the facts and evidence indicate that the worker was your employee under common law, we are not required to consider the extended definition in subsection 12(3) of the SGAA. However, in order to leave no doubt as to the Commissioner's view of this matter, the extended definition has been considered and is discussed below.

Question 2

Was the worker your employee 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, which 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.

SGR 2005/1 explains when an individual is considered to be an 'employee' under section 12 of SGAA.

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 provided, the worker provided skills and expertise for the Principal and was remunerated primarily for their own labour and skills. There is no evidence that their remuneration was intended to cover any more than this, furthermore the evidence provided does not suggest that the worker had any expenditure with respect to provision of equipment or materials to undertake the duties required.

The individual must perform the duties themselves

As discussed earlier, we consider that the facts and evidence indicate that the worker did not have the right to delegate work to others.

Not paid to achieve a result

As previously discussed, the worker was paid an hourly rate, this in conjunction with other relevant facts and evidence indicates that the worker was not paid for a result.

Our conclusion regarding the expanded definition of employee

Accordingly, the facts and evidence indicate that the worker also meets the extended definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

After considering all available facts and evidence relating to the working relationship between you and the worker, the Commissioner concludes that the worker meets the definition of an employee for the purposes of the SGAA under both the common law definition and expanded definition as set out in subsection 12(3) of the SGAA.

Therefore you did have an obligation to provide superannuation support to the worker in accordance with the SGAA for the period under review.