Edited version of your private advice

Authorisation Number: 1051313104725

Date of advice: 29 November 2017

Ruling

Subject: Status of the Worker

Question 1

Was the Worker considered your common law employee as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the quarters ended 30 September 20XX to 30 June 201X inclusively?

Answer

No. Refer to ‘why we have made this decision’

Question 2

Was the Worker your employees by virtue of subsection 12(3) of the SGAA?

Answer

No. Refer to ‘why we have made this decision’

This ruling applies for the following period

1 July 20XX – 30 June 201X

Relevant facts and circumstances

● the Principal provided a written contract

● the Worker was engaged through the Principal

● the Worker had their own Australian Business Number (ABN) and was registered for the Goods and Services Tax (GST)

● the Worker was paid on the basis of providing installation jobs

● the Principal provided a standard rate and the Worker could renegotiate this rate and used this option

● the Worker met their own expenses in relation to all insurances, provision of his/her transport and tools and all other expenses related to their work

● the Worker could provide services to other individuals or businesses

● the Worker had the right to delegate and used this option

● the Worker was not entitled to annual, sick or long service leave

Summary

The facts and evidence suggest that the Worker was not your employee for the purposes of the SGAA under either the common law definition or the expanded definition as set out in subsection 12(3) of the SGAA. Therefore the Principal did not have an obligation to pay superannuation contributions on behalf of the Worker.

Detailed reasoning

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

While the term ‘employee’ which is defined in section 12 of the SGAA, includes common law employees, it also 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’. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? (SGR 2005/1) from a ‘contract for service which is typically a contractor and principal type of relationship and does not attract an SGC liability.

Therefore, it is necessary to consider not only whether there is a common law relationship of employer/employee between the parties, but also, if the common law test is not met or is inconclusive, whether the expanded definition of ‘employee’ in subsection 12(3) of the SGAA applies. If a worker is not an employee under subsections 12(1) or 12(3) of the SGAA, their status is described as an independent contractor and there is no SG obligation.

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.

Question 1

Was the Worker considered your common law employee as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the quarters ended 30 September 20XX to 30 June 201X inclusively?

Common law employee

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.

Even though the modern approach to defining the contractual relationship is to have regard to the totality of the relationship between the parties, control is still an important factor to be considered. This was recognised by Wilson and Dawson JJ in Stevens v. Brodribb ((1986) 160 CLR 16 at 36) (Stevens v. Brodribb), where they state:

In many, if not most cases, it is still appropriate to apply the control test in the first instance because it remains the surest guide to whether a person is contracting independently or serving as an employee.

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.

The professional skills involved in carrying out the work are also a useful guide in determining whether a person is carrying on their own business or not. The provision of professional skills or skilled labour may imply that the contractor is able to make an independent career by selling that skill. In the case of a contractor with an independent career, it may be implied that the contractor is able to conduct their own business using those skills.

‘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.

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 employee has merely substituted or shared the workload.

However, a clause in the contract may permit the worker to delegate the task to another worker subject to approval of the principal, as the principal may not want an unknown worker to be working on their site or who may not be suitably qualified.

Therefore, under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). A person who has a right to delegate work (whether or not that right is exercised in practice) does not work under a contract wholly or principally for their labour. Unless the contract expressly requires the service provider to personally perform the contracted services, the contractor is free to arrange for his or her employees to perform all or some of the work or may subcontract all or some of the work to another service provider.

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.

Application of the law in these circumstances

The Principal first engaged the Worker as an individual sole trader in 20XX. As evidenced in the invoice sent to the ATO the Worker had an ABN and as per the supplied contract the Worker prepares the invoices and are provided to the Principal and the payments are made to the Worker’s account.

The Worker’s ABN status and GST registration all publicly available information, were active at the time a contract was made with the Worker.

The Principal engages contractors for installation services. The Principal has recommended instalment guidelines for various products however does not require or check that these guides have been followed. In the Worker’s case the Principal only required that the installations were completed to required industry standards.

The Worker could indicate their availability to and their capacity to perform the work on any agreed day, and could accept installations in line with their capacity. The Principal did not mandate that the Worker attend work on any particular days or how long they should work on any particular day.

Overall, 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 principal and independent contractor.

A run sheet was provided to the Worker, with jobs on the sheet scheduled to be completed at some point during the day. If the jobs were booked the contractor could communicate directly with the client to change the time if the booking did not suit. The Worker was free to turn down a job and was free to decide where to go and what order to do the jobs.

The Worker has an ABN and is registered for GST and provided invoices to the Principal. The Worker was not required to wear a uniform and their van did not display the company’s logo, nor did they have the company’s business cards. The Worker had no entitlement to annual leave sick leave, long service leave or superannuation. 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 principal and independent contractor.

The Worker was paid for a result on a piece meal basis, on installation. The Worker could and did negotiate rates that were more than the standard price list, if the costs of consumables increased.

The Worker was not remunerated for time or the method of execution of the work. It was instead by reference to the result. For example the Worker had a fixed piece or negotiated rate for installation of certain products, and the Worker would be paid for the installation of the product, not the time it took to install the product. 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 principal and independent contractor.

The Worker could choose to delegate any installation jobs at their own discretion without the necessity to obtain approval from the Principal. Where the Worker chooses to delegate to another party, the Worker is responsible for the workmanship of this party. Where any job or part of any job is delegated, the Worker invoices the Principal for the agreed rates and is then solely responsible for remunerating the other party.

The Principal was aware that the Worker in the past had in fact delegated many installation jobs. 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 principal and independent contractor.

The Worker was responsible for the rectification of any defects or errors in the work. If a customer queries the workmanship or the quality of the installation job, the Principal would request that the Worker investigate and rectify the problem in their work, in their own time and at their cost.

The Worker was responsible for their own insurances and the Principal undertook periodic checks to insure that these were held. Ultimately it was the Worker’s responsibility to ensure that these were maintained Overall, we are satisfied that the risks test in isolation is more in favour of the notion that the relationship between you and the Worker is one of principal and independent contractor.

The Principal stated that the Worker was required to have their own vehicle in order for them to travel to each job location. The Worker must also supply tools such as a hammer drill, impact drill etc. to assist with installation. Overall, we are satisfied that the capital test is more in favour of the notion that the relationship between you and the Worker was one of principal and independent contractor.

Our conclusion regarding the common law definition of employee

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

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).

Question 2

Was The Worker your employees by virtue of 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.

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 as an installer and not through their labour but was instead remunerated for producing a result. The facts and evidence confirm this was as well as the fact that the Worker had to pay for and rectified any mistakes in their work.

The individual must perform the duties themselves

As discussed earlier, we consider that the facts and evidence indicate that The Worker did have the right to delegate work to others.

Not paid to achieve a result

As discussed earlier, we consider that the facts and evidence indicate that The Worker was paid for a result.

Our conclusion regarding the expanded definition of employee

Accordingly, as The Worker does not satisfy all three 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

After considering all available facts and evidence relating to the working relationship between the Principal and The Worker, the Commissioner concludes that The Worker does not meet 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 did not have an obligation to provide superannuation support to The Worker in accordance with the SGAA for the period under review.

We took these laws into account

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

ATO view documents

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

Other references

Stevens v. Brodribb ((1986) 160 CLR 16