Edited version of your written advice

Authorisation Number: 1012993000421

Date of advice: 8 April 2016

Ruling

Subject: PAYG Withholding - Employee Vs Contractor

Question 1

Are the workers engaged by the entity to provide services considered to be employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The entity operates a business in the health and wellbeing industry where they offer services.

The entity engages workers to perform a particular service or treatment.

Critical features of the engagement are as follows:

• The hours worked are either agreed to, or as needed when a booking comes through. The worker advises you of their hours of availability and bookings are made accordingly.

• The worker is not provided with any training or manuals

• The worker is not supervised and no checks are made.

• The worker is able to refuse to do a particular job or task.

• The worker is able to provide their services to other individuals or businesses

• Depending upon client's requests, the worker may work alone or with another therapist. Some workers will only work from your premises and others will work elsewhere as well.

• It is not compulsory for the worker to wear a name badge or uniform promoting your business name or logo. However, the therapists have discussed wearing a uniform and name badges but this will not be enforced.

• All therapists work from the same booking document in order to ensure that there are sufficient rooms for treatments at any given time.

• Workers provide an invoice weekly identifying what they have done so that they can be paid accordingly.

• Fees for tasks are negotiated at interview stage, and once they are agreed, workers are given set rates for their treatments in an agreement.

• Workers are only paid for the treatments performed.

• No checks are completed that the work is completed before payment.

• No specific instructions are given as to whether the worker has to complete the work personally.

• The worker is to provide their own insurance.

• The worker is provided with all towels, beds and tables unless they require specific equipment.

• The worker is not reimbursed for their assets, equipment or tools.

• The owner provides suggested products for treatments. If the worker does not like the products, they do not have to use them or can refuse to perform the treatment.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Question 1

Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

A determination of whether an individual under a specific arrangement is an employee must be made by a consideration of the total factual circumstances in light of all of the indicators determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16 considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

These indicators include:

• The control test: The degree of control which the payer can exercise over the payee.

• The organisation or integration test: Whether the worker operates on their own account or in the business of the payer.

• The results test: Whether the worker is free to employ their own means and is paid to achieve the contractually specified outcome.

• The delegation test: Whether the work can be delegated or subcontracted (with or without the approval or consent of the principal).

• The risk test: Whether the worker bears the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

• Which party provides tools, equipment and payment of business expenses?

Control

The test for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. 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.

A high degree of discretion or latitude in the manner in which a task is performed does not, of itself, indicate a contract for services.

Further, although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment relationship. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements any control or direction must be expressed in terms of the contract only, so that outside the contractor is free to exercise their own discretion, because they work for themselves.

In this case, the worker lets the entity know their availability and bookings are then made accordingly. The entity provides the location of the task and the task specification. The worker is free to conduct the task any way they see fit provided it is within the specifications. The worker is reliant on the entity to assign the work and pay then for it. Although the worker has some control over how they complete a task, they rely on the entity to organise the appointment and payment.

Organisation or integration

In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payers business but the work is not integrated into the business rather is an accessory to it.

In this case the entity provides a location and the task specifications and how that task is done is up to the worker. They have full discretion as to how the work is done provided it is done within the specifications. They also have no obligation to work for the entity and are free to work for other organisations. They are also able to reject work offered to them by the entity. The workers have discussed wearing name badges and organising a uniform. Although the entity will not make this compulsory, it indicates that the workers feel they are a part of the business.

Results

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.

In this case the workers are paid for a given result. The worker supplies a weekly invoice to the entity and the worker is paid only for the treatments and tasks performed. The fees for tasks are negotiated during an interview between the worker and the entity. The worker is then given set rates in an agreement. The workers are free to employ their own means to achieve the result, and no instructions have been given in relation to sub-contracting out the task.

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.

In this case the worker was not given specific instructions about whether the worker has to complete the work personally. The workers are more likely to turn down the work rather than engage someone else on their behalf. It appears that the worker is able to delegate work to others without approval of the entity, if they are unable to complete the task personally.

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.

In this case the worker bears the risk and is responsible for providing, their own insurance. The worker is paid based on the activities performed but the completion of the activity is not checked by the entity prior to payment. They also have to pay any expenses and are not reimbursed by the entity.

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.

Further, 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.

In this case the entity provides the majority of tools and equipment to the workers to enable them to complete a task. All major equipment is provided. Specific items in relation to the individual activities are supplied by the worker.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that the workers are employees, and there is an obligation on the entity to withhold from payments made to the workers.

The entity engages the worker for a specific task at a specific time and demonstrates a clear control over the worker. Although the worker is able to work for other entities, they have discussed wearing a uniform as part of the business which indicates an employee relationship. The entity also supplies the majority of equipment required for the worker to complete their duties which further confirms that the employee is an employee rather than a contractor.