Edited version of your written advice

Authorisation Number: 1012927444717

Date of advice: 15 December 2015

Advice

Subject: Status of Worker

Question

Will cleaners paid by your business be employees in accordance with section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

No. Refer to 'Why we have made this decision'.

This ruling applies for the following period

1 July 2015 - 30 June 2016

This scheme commenced on

1 July 2015

Relevant facts and circumstances

1. You operate a business.

2. You previously employed staff who received superannuation guarantee payments.

3. You have stated that you intend to restructure the business which may include the possible hiring of contractors to perform services. You are the only person working in the business at present.

4. Contractors will have their own ABN and business. They will enter into an Independent Contractor Agreement (agreement) for a job. The agreement contains the following information:

• The engagement of the contractors commences on the date stated in the schedule and continues until terminated in accordance with the agreement

• The contractor will provide the services in a professional manner to the required standards and be liable for rectification of any work not up to required standard

• The contractor is entitled to engage in any other employment, occupation, consulting or other business activity directly or indirectly competitive with the business of the principal, provided that the contractor does not directly or indirectly make any client, customer, employee or contractor of the principal or any of its related entities aware of the contractor's business or employment activities which are outside of the scope of the agreement.

• The contractor has full discretion as to the manner in which work is performed in the course of its agreement with the principal, including the ability to engage sub-contractors.

• During course of its business with the principal, the contractor must only wear occupational clothing and nondescript clothing.

• The contractor will provide its own transportation, equipment, chemicals and sundries in the provision of its services under the agreement. This is included in the remuneration of the contractor's invoice to the principal. The contractor is free to hire or use the equipment of third parties should they not possess the required equipment or alternatively pay third parties to perform the services.

• The contractor will submit a quote to the principal for all services to be performed under this agreement, and the principal must approve the quote prior to the commencement of any and all services.

• On completion of the quoted services the contractor will submit an invoice to the principal for the amount and services as per the approved quote.

• The contractor bears all risks associated with the performance of the services and forever indemnifies the principal against any claims associated therewith.

• Prior to the date of this agreement the contractor must obtain, and thereafter must maintain during the period of this agreement, current policies of insurance, in respect of the services, against:

- All third party risks in relation to persons and property including public liability insurance

- Workers compensation claims; and

- Negligence by the contractor, an employee or subcontractor of the contractor.

• The contractor acknowledges it is solely responsible for all remuneration, expenses, taxes, leave entitlements, superannuation, workers compensation and other insurances in respect of the contractor, its employees or subcontractors.

• Either party may terminate the agreement for any reason by written notice to the other.

• The principal may terminate this agreement without notice if the contractor's services are no longer required due to a shortage of available work.

• The parties acknowledge that this agreement is intended as an agreement for the provision of services and that this agreement creates the relationship of principal and contractor and not any other relationship and, in particular, not the relationship of employer and employee, principal and agent or the relationship of partnership.

You have made the following statements

5. For the majority of the time the contractor will liaise with the customer on times/days and certain works to best suit the customer. The contractor can also employ workers for the jobs or subcontract out this work.

6. Contractors must have their own transport, chemicals, consumables and tools including vacuums, carpet cleaning machinery, pest control equipment (for which they must be licenced for) and if they don't have the equipment they are free to use or hire from third parties or to contract that portion of the job out.

7. The contractor is free in the way in which they work and undertake the specified job provided the customer is satisfied and the quoted job is completed fully and properly.

8. The contractor operates their own business and as such is free to accept works from the public and other contractors, and is free to advertise their services.

9. The contractor bears the commercial risk for all work and is responsible for any defects. Payment for work is only paid upon completion of quoted work to the accepted standard. The job that was quoted must be finalised before any payment is made.

Reasons for decision

Summary

Work performed in accordance with the terms of the contract agreement will not result in staff being employees under either the common law definition or the expanded definition as set out in subsection 12(3) of the SGAA. You therefore will not have an obligation to pay superannuation contributions on behalf of the workers.

Detailed reasoning

The SGAA states that an employer must provide the required minimum level of superannuation support for its employees or pay the Superannuation Guarantee Charge (SGC).

The definition of employee under section 12 of the SGAA includes a common law employee and 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'. Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? distinguishes this relationship from a 'contract for service' which is typically a contractor and principal type of relationship which does not attract an SGC liability.

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.

Common law employee

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.

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.

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. The importance of control lays not so much in its actual exercise 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.

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.

Results test

Where the substance of a contract is for the production of a given result, there is a strong indication that the contract is one for services.

'The production of a given result' means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

Delegation

The power to delegate or subcontract 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.

Whereas if an individual has unfettered power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. The contractor is free to arrange for their employees to perform all or some of the work or may subcontract all or some of the work to another service provider. In these circumstances, the contractor is the party responsible for remunerating the replacement worker.

A common law employee may frequently 'delegate' tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this 'delegation' exercised by an employee is fundamentally different to the delegation exercised by a contractor outlined above. 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 workers have merely organised a substitution or shared the work load. This is not delegation consistent with that exercised by a contractor.

Risk

An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies.

Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor.

Commonly, an independent contractor or entity would solely bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense.

An employee on the other hand, would bear no such responsibility and the liability for any defective work of the employee, either to a third party or otherwise, would fall to the employer in terms of the burden of cost or time for rectification.

Provision of tools and equipment and payment of business expenses

The provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

However, the provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor.

There are situations where very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work.

Furthermore, an employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car.

Conclusion - common law definition of employee

With respect to the relationship between you and the contractor, the facts and evidence provided points to the conclusion that the cleaner is not a common law employee of you. This is based on the following:

• You and the contractor are both entering into a contract for service and not employment. Both parties acknowledge via the terms of the contract that the contractor is running their own business.

• The contractor has full discretion as to the manner in which work is performed.

• The contractor will be running their own independent business and is free to accept work from the public and other contractors. The contractor is required to wear nondescript clothing.

• The contractor is paid for a result. On completion of the quoted services the contractor will submit an invoice to the principal for the amount and services as per the approved quote.

• The contractor is free to arrange for their employees to perform all or some of the work or has the ability to engage sub-contractors

• The contractor bears all risks associated with the performance of the services, workers compensation, public liability and negligence.

• The contractor will provide their own transportation, equipment, chemicals and sundries in the provision of its services under the agreement.

• The contractor is solely responsible for all remuneration, expenses, taxes, leave entitlements, superannuation, workers compensation and other insurances in respect of themselves, its employees or subcontractors.

As the facts and evidence indicate that a contractor is not an employee under common law, we are required to consider the expanded definition of employee under 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.

The words 'wholly or principally' are used to limit or restrict the types of contracts that will be covered by subsection 12(3). A contract that is partly for labour and partly for something else (for example, the supply of goods, materials or hire of plant or machinery), will only qualify if it is principally for labour.

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.

Subsection 12(3) was intended to extend the scope of the SGAA beyond traditional employment relationships to take into account some independent contractors who principally provide their own labour to meet obligations under a contract, and was designed to include a person who may not be an employee in the normal sense but who is in fact not very distinguishable from an employee.

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,

then 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.

Remuneration for personal labour and skills

The contractor signs an agreement with you to provide their labour and skills as well as transportation, equipment, chemicals and sundries to complete the designated job. This is a typical requirement of a service contract for a bona fide contractor.

Right to delegate duties

The agreement states that a contractor can delegate their duties to others, including sub-contractors. They are also free to perform the tasks in their own manner provided the end result is to the satisfaction of the customer.

Payment to achieve a result

The agreement indicates that the contractor is paid for a result based on jobs completed.

On completion of the quoted services the contractor will submit an invoice to you for the amount and services as per the approved quote.

Conclusion - expanded definition of employee

Accordingly, as a contractor fails to satisfy all three components of the expanded definition under subsection 12(3) of the SGAA, they do not meet the expanded definition of an 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, a contractor does not meet the definition of an employee for the purposes of the SGAA under either common law or the expanded definition under subsection 12(3) of the SGAA. Accordingly, you do not have an obligation to pay superannuation contributions for the benefit of your contractors.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

We followed these ATO view documents

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