Edited version of your written advice

Authorisation Number: 1013074819625

Date of advice: 26 August 2016

Advice

Subject: Superannuation guarantee

Question

Was the Worker an employee in accordance with section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

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

Your contentions have been taken into consideration. Please see 'Reasons for decision'.

This advice applies for the following period:

1 July 200X to November 20XX

Relevant facts and circumstances

1. The Principal is a building company specialising in new homes that employs a number of employees and subcontractors.

2. You have stated that the Worker has been working on and off for the Principal for approximately XY years. The worker has an ABN, pays their own insurance, contributes to their own superannuation and also works for other clients. Since November 20XX you have contracted the Worker via their ABN entity.

3. You have stated that a known Long Service Leave Fund has expressed the view that the Worker should be classified as an employee prior to becoming an ABN entity and therefore have contributions for portable long service leave made on their behalf.

4. You have provided the following information in Superannuation Guarantee: Status of the worker questionnaire Principal/Payer in relation to the Worker:

• The Worker was engaged in relation to qualified trade work for residential housing construction.

• The Worker worked unsupervised off construction plans.

• The Worker often worked from their own business workshop to fabricate building materials.

Terms and conditions of the formation of the contract

• The Worker contacted the Principal seeking work.

• The Principal did not enter into a written contract with the Worker.

• The Worker was responsible for completing the job as allocated. The Worker would send invoices as progress claims and provided their ABN.

• There were no fixed hours of work.

• The Principal agreed to a higher rate of pay to cover insurance, superannuation etc.

• The Worker was able to renegotiate their rate of pay and terms and conditions on a project by project basis.

• The Principal had the right to dismiss or terminate the services of the Worker if they did not comply with occupational health and safety requirements.

• There were X other workers engaged on the same or similar basis.

Control test

• The Principal provided the Worker with occupational health and safety training.

• The Worker chose their working hours and days.

• The Principal did not require the Worker to attend meetings within the Principal's business and/or with the Principal's clients.

• The Worker was not entitled to paid breaks.

• The Principal did not schedule the jobs or tasks to be carried out by the Worker.

• The Principal directed the Worker to the relevant work site.

• The Worker was not supervised by the Principal or their representative, however, an independent building surveyor's review was conducted.

• The Worker could refuse to do a particular job or task.

• If the Worker wanted to take time off they were not required to seek The Principal's permission or to provide prior notice.

Integration test

• The Worker could provide their services to other individuals or businesses and made items for other clients.

• The Worker worked alone.

• The Worker did not train, supervise or assess the work of any other employee or workers of the Principal's business.

• The Worker did not have their own name badge, clothing, business cards, stationery or any other items promoting their business or services.

• The Principal did not advertise its business on any of the assets/equipment/tools used by the Worker.

• The Worker did not advertise their business on any of the assets/equipment/tools they used.

Results test

• The Worker would submit invoices for payment.

• The Worker set the fees for tasks done on a job by job basis.

• The Worker's payment was not dependent on the completion of the task - the task was always finished.

• The Principal would undertake checks to confirm that the Worker had completed their work before they were paid - the Principal is responsible for the business delivering.

• The Worker was paid into a bank account in their name.

• The Worker did not receive payment or reimbursement of any allowances, such as a car allowance, tool allowance, travel allowance, holiday pay, sick pay, training etc.

• The Principal did not deduct any amount from the Worker for income tax, superannuation or any other deduction.

Delegation test

• The Principal did not give specific instructions to the Worker as to whether they were to complete the work personally.

• If the Worker was sick or went on holidays, the Worker arranged for their work to be done while they were absent.

• The Worker could not organise for their work or tasks to be completed by an employee of the Principal's business. The Worker could not arrange for another person engaged by them to complete their work or tasks.

Risk test

• The Worker was responsible for paying workers compensation and private accident insurance. The Principal was liable to pay public liability insurance.

• If the Worker made a mistake or broke something when doing their work, they were required to correct the work in their own time, pay for the materials used to correct their mistake and to pay for their breakage.

Provision of tools and equipment and payment of business expenses

• The Principal did not supply the Worker with any assets, equipment or tools to complete their work.

• The Principal did not reimburse the Worker for the assets, equipment or tools.

• The Principal provided the materials for the job. Both the Principal and the Worker arranged for the delivery of the materials.

• The Worker was required to wear protective work gear as required under occupational health and safety regulations.

• The Worker provided the protective work gear as part of OH&S.

5. The following information was provided by the Worker in the Superannuation Guarantee: Status of the worker questionnaire Worker/Payee:

• The Worker was engaged by the Principal to complete qualified trade work in relation to residential housing construction.

• The Worker worked independently using construction plans for residential houses.

Terms and conditions of the formation of the contract

• The Worker contacted the Principal to enquire if there was any work available.

• The Worker did not enter into a written agreement with the Principal.

• The Worker was able to negotiate the rate of pay and terms and conditions.

• The Principal had the right to terminate the Worker's services.

Control test

• The Worker did not complete any training with the Principal.

• The Worker determined the hours of work.

• The Worker was not required to attend meetings within the Principal's business and/or with the Principal's clients.

• The Worker was not entitled to paid breaks.

• The Principal did not schedule the job or task to be carried out by the Worker.

• The Worker was directed to where the job or tasks were to be performed. All jobs were site specific.

• The Worker was not supervised however an independent building surveyor check was performed.

• The Worker could refuse to do a particular job or task.

• If the Worker wanted to take time off they were not required to get the Principal's permission nor provide prior notice.

Integration test

• The Worker advertised their services during the period they worked for the Principal.

• The Worker could provide their services to other individuals or businesses independently of the Principal.

• The Worker worked alone.

• The Worker did not train, supervise or assess the work of any other employee or workers of the Principal's business.

• The Principal did not provide the Worker with a name badge, clothing, business cards, stationery or any other item promoting the Principal's name or logo.

• The Worker did not have their own name badge, clothing, business cards, stationery or any other items promoting their business or services.

• The Principal did not advertise their business on any of the assets, equipment or tool used by the Worker.

• The Worker did not advertise their business on any of the assets, equipment or tools used by the Worker.

Results test

• The Worker submitted invoices to the Principal.

• The Worker set the fees for the work or tasks to be done.

• The rate of pay was changed.

• Payment was not dependent on the completion of the job.

• The Worker was paid directly into their bank account.

• The Worker did not receive payment or reimbursement for any allowances such as a car allowance, tool allowance, travel allowance, payment of expenses such as petrol, tools, materials and phone, holiday pay, sick pay, workers compensation, superannuation or training.

Delegation test

• The Principal did not give the Worker specific instructions about whether they were to complete the work personally.

• If the Worker was sick or went on holidays, the Worker arranged for the work to be done while they were away.

• The Worker could not organise for their tasks to be completed by an employee of the Principal's business. However the Worker could organise for their tasks to be completed by another person engaged by them or any other person.

Risk test

• The Worker was responsible for paying workers compensation insurance.

• The Worker was not required to guarantee their work for a period of time.

• If the Worker made a mistake or broke something whilst doing their work they were required to correct the work in their own time, pay for the materials used to correct the mistake and pay for any breakage.

Provision of tools and equipment and payment of business expenses

• The Worker supplied the assets, equipment and tools.

• The Worker was not reimbursed by the Principal for any of their assets, equipment or tools.

• The Principal supplied the materials for the job.

• Both the Worker and the Principal arranged delivery of materials to a job.

• The Worker was required to wear and supply protective work gear.

Reasons for decision

Summary

6. Work performed by the Worker will not result in them being an employee 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 Worker.

Detailed reasoning

7. 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).

8. 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.

9. 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.

10. 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.

11. Accordingly it is necessary to determine the true nature of the whole relationship between the Principal and the worker, as to whether there was a common law employer and employee relationship or whether the Worker met the expanded definition of employee under subsection 12(3) of the SGAA.

12. 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.

13. Contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole - that is, the parties cannot deem the relationship between themselves to be something that is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of a relationship is one of employment, the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker's status is that of an independent contractor.

Common law employee

14. 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.

Control

15. 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.

16. 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.

17. 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.

18. In this case the Worker worked independently to complete the job and chose their own working hours and days, often working from their own business workshop. The Worker was not entitled to paid breaks or leave and was not supervised by the Principal or their representative. Other than directing the Worker to the relevant project site, the Worker's tasks were not scheduled by the Principal and an independent building surveyor would review the job on completion.

19. The Worker was not required to attend meetings within the Principal's business or with the Principal's clients.

20. Both parties have stated that the Worker could refuse to do a particular task.

21. The above factors indicate that the Worker had the level of control of an independent contractor.

Integration

22. 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.

23. 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.

24. 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.

25. Under the arrangement the Worker provided their services as a qualified trade and was free to provide their services to other individuals or businesses independently of the Principal, which they did. The Worker has an ABN, worked alone and did not train, supervise or assess the work of any other employee or worker of the Principal.

26. The Worker was not required to identify as an employee of the Principal's business and the Worker could decline to take on a new job.

27. The above factors indicate that the Worker was providing services to the Principal as an individual carrying on their own business.

Results test

28. 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.

29. '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.

30. 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.

31. The Worker was not paid on an hourly basis and set the fees for tasks done on a job by job basis. The Worker did not receive payment or reimbursement of any allowances. Invoices were submitted for payment and the Principal would undertake checks to confirm that the job was completed before payment was made directly into the Worker's bank account.

32. The conditions outlined above are consistent with a result based contract.

Delegation

33. 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.

34. 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.

35. 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.

36. The Principal did not give the Worker specific instructions that they were to perform the work personally. If the Worker was sick or away on leave they were responsible for arranging the work to be done in their absence. The Worker could not organise for their work to be completed by an employee of the Principal's business, with the Worker stating that they could organise for their work to be completed by another person engaged by them.

37. The Worker under this arrangement had the right of delegation.

Risk

38. 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.

39. 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.

40. 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.

41. 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.

42. In accordance with the arrangement, where the Worker made a mistake or broke something when doing their work, they were required to correct the work in their own time, pay for the materials used to correct the mistake and pay for any breakages. The Worker has also stated that they were required to guarantee their workmanship.

43. The Worker was also responsible for paying workers compensation and private accident insurance, while the Principal was responsible for public liability insurance.

44. Under this arrangement the Worker bears a significant risk in relation to defective work and injury.

Provision of tools and equipment and payment of business expenses

45. 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.

46. 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.

47. 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.

48. 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.

49. The Worker was required to supply transport, tools, equipment and protective work gear for the job without reimbursement from the Principal. The Worker also used their own workshop to fabricate building materials. The Principal provided the materials for the job and delivery was arranged by both the Principal and the Worker.

50. The above factors are consistent with an independent contractor arrangement.

Other indicators

51. In addition to the above, other indicators of the nature of the contractual relationship have been variously stated and have been added to from time to time. Those suggesting an employer-employee relationship include the right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of benefits such as annual, sick and long service leave and the provision of other benefits prescribed under an award for employees.

52. The Worker did not work exclusively for the Principal in this case and was responsible for their leave, insurance and superannuation obligations. It has been stated that under the terms of the arrangement the Principal may only terminate the services of the Worker due to an OH&S breach.

53. The requirement that a worker wear a company uniform is an indicator of an employment relationship existing between the contracting parties. The Worker was not required to wear a company uniform in this case.

Conclusion - common law definition of employee

54. With respect to the relationship between the Principal and the Worker, the facts and evidence provided point to the conclusion that the Worker was not a common law employee of the Principal.

55. As the facts and evidence indicate that the Worker was not your 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

56. 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.

57. 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.

58. 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.

59. 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.

60. 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,

Remuneration for personal labour and skills

61. The Worker was paid to provide qualified trade services to the Principal under an arrangement to provide their labour and skills as well as transportation, equipment, tools and workshop to complete the designated job.

62. The Worker also incurred ongoing expenses in the provision of their tools and equipment together with the requirement to pay workers compensation and personal superannuation.

63. Based on the available facts, remuneration was not for personal labour and skills.

Right to delegate duties

64. As stated previously, the Worker had the right to delegation under this arrangement.

Payment to achieve a result

65. The Worker set the fees for tasks done on a job by job basis and was not paid on an hourly basis for their labour. Invoices were submitted for payment and payment was not received until an assessment of the job had been completed.

66. This is a result driven arrangement.

Conclusion - expanded definition of employee

67. Accordingly, as the Worker does not satisfy any components of the expanded definition under subsection 12(3) of the SGAA, they do not meet the expanded definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

68. Upon considering of all the available facts and evidence, the Commissioner is satisfied that the working relationship between the Principal and the Worker did 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 did not have an obligation to pay superannuation contributions for the benefit of the Worker.

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?