Edited version of your written advice

Authorisation Number: 1012918270641

Date of advice: 7 December 2015

Advice

Subject: Superannuation Guarantee status of the worker

Question 1

Is the Worker considered your common law employee as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the ten quarters ended 31 March 2002 to 30 June 2004 inclusively and the eight quarters ended 30 September 2013 to 30 June 2015?

Answer

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

Question 2

Is 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 periods:

1 July 2002 to 30 June 2004, and

1 July 2013 to 30 June 2015

The arrangement commences on:

1 July 2000

Relevant facts and circumstances

• The Principal requested advice regarding whether or not the Worker is an employee of the Principal for the purposes of the SGAA during the period.

• The Principal provided the following information in their request for advice:

• The Worker has not had SG contributions paid on their behalf for the entirety of their time with the Principal which dates back to 200X.

• The Worker is currently aged in their 70s.

• In order to facilitate the objectives of the Principal, the Worker performs a number of functions.

• The business office of the Principal is located within the home of the Worker.

• The Principal provides equipment to do the work. The Worker uses the equipment principally for the business but is free to use it for personal tasks as well. The Worker provides fixtures and does not bill the Principal for incidentals such as electricity.

• The Principal pays the Worker an allowance for utilities.

• The Principal and the Worker have used the ATO Contractor Decision Tool. Their answers were included with the Principal's request for advice.

• The Worker and the Principal agreed on the following points in their answers to the ATO Contractor Decision Tool:

• The agreement is not made with an interposed entity for the services of the Worker.

• A labour hire firm is not paid for the services of the Worker.

• The Worker is not an apprentice.

• The Worker has an ABN.

• The basis for the amount paid by the Principal to the Worker is an agreed amount per period (month) with variations if there is an unusually high workload, for example. Also reimbursement for expenses as agreed from time to time.

• The basis for the Principal making payment to the Worker is an invoice the Worker provides.

• The Worker and Principal provide equipment to do the work.

• The Principal's executive split into two groups that both answered the Contractor Decision Tool. Group A and the Worker agreed in their answers, while Group B differed, as follows:

• In relation to whether the Worker has the right to pay another person to do the work instead of them, Group A and the Worker answered "no."

• Group A reasoned that the Principal retains the Worker specifically because of their knowledge and experience with the Principal particularly.

• While the Worker reasoned that it has not been suggested or stated that they would not be expected to perform the work of the Principal them self.

• Whereas, Group B said "yes" with the reasoning that although the Worker does the bulk of the work them self, there is no specific prohibition on their paying someone to work on their behalf. That is a decision for the Worker.

• Group B answered that there is no written contract specifying that the Worker has the right to pay another person to do the work instead of the Worker, and that they have not paid another person to do any work under the agreement.

• In relation to who is responsible for providing the plant and equipment and/or tools of trade needed to perform the work, Group A and the Worker answered "The Payer."

• Group A reasoned that in all material respects the Principal provides the main elements of the Worker's equipment.

• The Worker reasoned the Principal provides and maintains the major equipment that they use in their work.

• Whereas, Group B said "Mix of Payer and Employee" with the reasoning that the Principal reimbursed the Worker for the purchase of equipment, but the Worker provides their own fixtures and electricity. The Worker can use the equipment for personal tasks if they wish.

• In relation to whether the Worker is liable for the cost of rectifying any defect in the work performed, Group B said "Yes," whereas Group A and the Worker said "No." Group A reasoned that the Worker is paid on an hourly basis by invoice (at an agreed monthly rate). If a problem arises and there is significant extra time required to do or fix something, then the Principal will pay for that extra time.

• The Worker works a certain number of hours for the Principal per month;

• wages records are kept using accounting software;

• The Worker has an ABN and provides invoices to the Principal.

• The Principal provided a sample of six invoices received from the Worker on a monthly basis for the work they perform at a set rate on each invoice.

• In support of the request for advice, the Principal provided the following additional information:

• The Principal formed the relationship with the Worker 14 or 15 years ago. The Worker was known to the Principal's executive. The Principal's executive decided that they needed the Worker's skills and knowledge. Accordingly, they approached the Worker about providing this assistance. The Principal knew that the Worker was available and had the skills they required.

• The rates, terms, and conditions were decided on the basis of the Principal, declaring to the Worker what they could afford and asking the Worker to accept this offer.

• The Worker receives no additional allowances for travel or clothing etc, they are only paid for hours worked.

• The Principal's Committee and President have the right to terminate or dismiss the Worker if their services are no longer required.

• If the Worker goes on holidays, in practice their routine work stops, they are not replaced by the Principal; neither does the Worker arrange a replacement. If there is an urgent or emergency task, the Principal will handle it.

• The Worker could provide their services to another entity if they had time.

• The Worker does not have their own business any longer, the Principal confirmed that the Worker was available. The Principal is their only client.

• The Worker does not have their own workers' compensation insurance, neither does the Principal.

• If the Worker has their own public liability insurance it is in their private capacity through their home insurer as they perform their tasks in their own home.

• The Principal has its own Public Liability insurance however, not in regard to the Worker or their services in particular.

• The Worker does not correct their mistakes in their own time at no charge to the Principal. At times previously when they have made errors and significant hours of work are required to correct them, the agreement with the Worker is that the Worker will be paid for these hours.

• The Worker has a title in the Principal's organisational structure; to assist the members of the Principal's executive is part of their role in the organisational structure. Then the Worker's other services for the Principal are added to this.

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

Records held by the Australian Taxation Office

Request for advice from the Principal

Covering letter to the Request for advice the Principal

Six Invoices from the Worker to 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 is 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

Ordinary meaning of 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).

Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? (SGR 2005/1) explains when an individual is considered to be an 'employee' under section 12 of the SGAA.

The question of whether someone is an employee is one of fact, and is determined by examining the terms and circumstances of the contract, in conjunction with the key indicators expressed in common law. The totality of the relationship must be considered to determine whether, on balance, the worker is an employee. No one indicator is in itself determinative of the relationship. These indicators are discussed below.

Terms and circumstances of the formation of the contract

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

When considering the intentions of the parties in forming the contract, the task is to decide what each party could reasonably conclude from the actions of the other. 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.

Control

The extent to which the engaging entity 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 lays not so much in its actual exercise, but in the right of the employer to exercise it.

Does the worker operate on his or her own account or in the business of the payer?

If the worker's services are an integral and essential part of the business that engages them (under a contract of service), 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 (under a contract for services), 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.

'Results' contracts

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. Payment is often made for a negotiated contract price, as opposed to an hourly rate.

Whether the work can be delegated or subcontracted

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.

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.

Provision of tools and equipment and payment of business expenses

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

In your case

The Principal engaged the Worker by word of mouth as the Worker was known to the Principal when the need for the Worker's skills arose to assist the Principal's business and the Principal approached the Worker. The Principal disclosed what they could afford each month for the Worker's services and the Worker accepted this offer. There is no evidence provided that there was a written agreement between the parties. This method of recruitment could be utilised in both an employer and employee relationship and a principal and independent contractor relationship. The regular hours of work performed each month 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 is inconclusive.

From the information provided, the bulk of the work was performed in the business office of the Principal which is in the home-office of the Worker. The Worker performed the bulk of the work without direct supervision from the Principal who initiated the relationship with the Worker to provide skills and expertise they lacked. However the fact that there have been instances when the Worker has been directed to correct perceived errors in their work, indicate that the Principal has exercised a right to approve and control the work of the Worker. Therefore based on the information provided, we are satisfied that the control test in isolation is more in favour of the notion that the relationship between you and the Worker is one of employer and skilled employee.

The Worker is required to work certain hours per month. The business office of the Principal is in the home of the Worker where they perform duties essential to the running of the Principal's business. The Worker has a title within the organisational structure of the Principal. They were selected for this role because of their knowledge and experience of the Principal in particular and part of their duties is assisting the Principal on an ongoing basis.

The Worker has an ABN, did run their own business providing related services previously, and can provide services to other entities if they have time. However, the Principal took action to confirm at the beginning of the relationship that the Worker was not self-employed any longer. The Principal is the Worker's only client. 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.

Both parties agree that payment to the Worker was not dependent on the completion of specific tasks or particular projects, rather the Worker receives an agreed amount per month on an ongoing basis with variations if there is an unusually high workload. The invoices provided indicate that the basis upon which the Worker was paid was crucially the amount of time in the pay period in which they have performed work for the Principal. The Worker is reimbursed for expenses. 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 is one of employer and employee.

The information provided by both parties indicates 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 both parties also agree that no one else performed routine services in the event of an absence of the Worker. The Principal would deal with an urgent matter in the event of the Worker taking holidays. The Worker has not paid anyone else to perform work for the Principal.

As the Worker was paid to perform work at an amount per pay period 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.

The information provided by both parties agrees that the Worker was not required to rectify any mistakes unpaid in their own time or at their expense. Indeed if substantial time performing rectification work was required to correct mistakes, by agreement the Worker was paid by the Principal for this time. No evidence has been provided regarding insurances carried by the worker. The Principal does not carry workers compensation or public liability insurance in regard to the Worker's services. Overall, we are satisfied that the risk test in isolation is more in favour of the notion that the relationship between you and the Worker was one of employer and employee.

The Worker stated that the Principal provides and maintains the major equipment that they use in their work. The Principal acknowledges this however the information provided also indicates that the Worker provides fixtures and utilities to run the Principal's business office from their home. Overall, we are satisfied that the capital test in isolation is inconclusive.

Our conclusion regarding the common law definition of employee

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 is your employee.

The facts and evidence provided indicate that the Worker is effectively integrated into the Principal's business as a skilled staff member, performing regular though professional duties essential to the running of the Principal's business, for a rate of pay per period, rather than being paid when and only when she completed a specific result, without the apparent right to delegate, and without liability for commercial risk.

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.

Employee under subsection 12(3) of the SGAA

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.

In this case, based on the facts and evidence provided, the Worker provided their skills for the Principal on an on-going basis and is remunerated principally for their labour. There is no evidence that their remuneration was intended to cover any more than this, indeed the evidence provided indicates that the Worker was reimbursed for expenses and their time taken rectifying any mistakes in their work.

The individual must perform the duties themselves

As discussed earlier, while this was not specifically discussed between the parties, 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 amount per pay period, 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 do have an obligation to provide superannuation support to the Worker in accordance with the SGAA for the period under review.