Edited version of your written advice

Authorisation Number: 1051212720774

Date of Advice: 22 May 2017

Ruling

Subject: Employee Vs Contractor

Question

Is the worker engaged by the Entity to provide services of an Administrative Assistant considered to be an employee 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 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Entity has engaged the services of an individual (the worker) to perform the services of an Administration Assistant for a number of years.

The worker's duties include bookkeeping and general administration duties, including attending to emails, organising certificates and managing the membership database.

Critical features of the engagement are as follows:

● The worker works from a home office.

● The worker was provided basic written and verbal instructions when they began their work. Procedures have changed over time and the worker works with the Chairperson and Treasurer to update procedures so they are efficient and practical.

● The worker was given training in MYOB.

● The worker chooses their own hours, however they are limited to a maximum of X hours per month. An extension of this time is to be negotiated when needed with the Management Committee.

● The entity does not schedule the jobs/tasks to be carried out by the worker; they know what needs to be done and determines the priority and sequence of tasks at times appropriate for them to complete them.

● When necessary, the worker has web based meetings with the Chairperson or Treasurer to discuss tasks and possible improvements to procedures. There is also an annual review of tasks with the Chairperson via a web based meeting.

● The worker works together with the Management Committee to ensure the administration of the entity is running smoothly.

● When templates for letters to the members were set up, they were checked by committee members.

● The worker cannot refuse to do a particular job or task, and the job or task must be completed by them. However if they are unavailable to do a particular job or task, the entity delegates jobs where possible, or it waits for the worker to be able to do the tasks.

● The worker can provide their services to other individuals or businesses.

● The worker does not train, supervise or assess the work of other people in the business.

● The worker does not wear a name badge, clothing or a uniform promoting either the entity, or their own, business name or logo.

● The entity sets the rate of pay, which was accepted by the worker.

● The worker creates monthly invoices and is based on the time worked, not the completion of a job or task.

● The entity does not perform any checks to confirm that the worker has completed their work tasks before they are paid. However during an annual discussion between the worker and the Chairperson, they look back over the year so gather how well both parties feel the tasks have been achieved, and together they identify ways of streamlining the administrative processes.

● The entity does not have Worker's Compensation Insurance, as by their understanding, based on advice received, they do not have any employees. The members of the Committee of Management are all volunteers and you were advised that the worker works as a Contractor.

● Each individual member of the entity has their own Public Liability Insurance, but not the organisation as a whole. However it has Public Liability Insurance/Association and Officials Insurance cover organised through a broker.

● The entity does not require the worker to have any insurance in order to perform their duties.

● The entity has provided the worker with a laptop for their use, and reimburses the worker for specific materials required to fulfil the worker role, namely laminating pockets and parchment for certificates that they issue on their behalf, stamps and envelopes.

● The entity does not pay for ink, paper or other consumables, nor does it reimburse the worker for electricity or other office expenses.

● A letter of appointment exists between the entity and the worker, which outlines the duties of the worker. However the document does not characterise the relationship between the parties as either employee or contractor.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1.

Reasons for decision

Section 12-35 of Schedule 1 to the TAA 1953 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?

Terms and the circumstances of the formation of the contract

In determining the nature of the contractual relationship, it is important to consider all the terms and conditions of the contract between the parties, whether express or implied, in light of the circumstances surrounding the making of the contract.

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 the 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.

As Gray J stated in Re Porter: re Transport Workers Union of Australia:

Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

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 conducts their activity on a monthly basis, and is authorised to work up to 15 hours per month. A summary of work done for the month is submitted with the invoice.

The worker was provided basic written and verbal instructions when they began their work, but choose their own hours and sets priorities to complete the required tasks. However the worker participates in web based meetings with committee members to discuss tasks, possible improvements to procedures and annual reviews of performance.

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 direction on tasks that are required to be performed, 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 not able to reject tasks required by the entity. The worker is not required to wear name badges or uniform.

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 worker is paid for hours worked to complete particular tasks. The worker supplies a monthly invoice to the entity and the worker is paid for hours worked. The hourly rate is set by the entity and accepted by the worker. The worker is free to employ their own means to achieve the 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.

In this case the worker cannot refuse to do a particular job or task, and the job or task must be completed by them personally. However, if they are unavailable to do a particular job or task, the entity delegates jobs where possible, or waits for the worker to be able to complete the job or task.

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 is paid based on the hours worked and the tasks completed. The entity does not perform any checks to confirm that the worker has completed their work tasks before they are paid. However during an annual discussion between the worker and the Chairperson, they look back over the year so gather how well both parties feel the tasks have been achieved, and together they identify ways of streamlining the administrative processes.

The worker has their own Public Liability Insurance, but the entity does not require the worker to have any insurance in order to perform their duties.

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 has provided the worker with a laptop, and reimburses them for specific materials required to perform their work duties. However some expenses, including home office expenses, are not reimbursed.

Conclusion

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