Edited version of your written advice

Authorisation Number: 1051320417440

Date of advice: 26 February 2018

Ruling

Subject: Status of the Worker

Question 1

Is the Worker considered a common law employee of the Principal as defined by subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period 1 July 2016 to 30 June 2017 inclusive?

Answer

Yes. Please refer to ‘why we have made this decision’.

Question 2

Is the Worker an employee of the Principal by virtue of subsection 12(3) of the SGAA for the period DD MMM YYYY to DD MMM YYYY inclusive?

Advice

Yes. Please refer to ‘why we have made this decision’.

We considered these to be relevant facts

On a specific date in 2017 you lodged a private ruling application for the Principal, requesting advice as your superannuation guarantee (SG) obligations to the Worker.

Based on the information provided, we considered the following to be relevant facts:

● The Worker is a builder.

● The Principal is a builder of new homes.

● The Principal contracts with the Worker to perform various activities in new homes.

● The Worker provides a legitimate Australian Business Number (ABN) in their own name and is registered for Goods and Services Tax (GST).

● The Worker provides all tools and equipment to undertake their work and a vehicle to carry their tools and move from job to job.

● The Worker leaves their tools and vehicles at their residence overnight.

● Payment to the Worker is predominantly for labour.

● The Worker performs building work to the general public and other builders.

● The Worker is paid based on a reverse written quote and is required to achieve a satisfactory result.

● The Principal provides materials for the building tasks.

● The task process is as follows:

● The Worker attends the house site and takes measurements and notes the tasks involved.

● The Worker provides this to the Principal on a relevant sales order form.

● The Principal then produces a purchase order setting out what the Worker will be paid for the tasks performed.

● The Principal and Worker have pre agreed rates that are paid for different tasks.

● The Worker completes the tasks – the Principal inspects tasks – if it needs correcting, the Worker has to come back and fix them – if there are no fixes to be done then the Principal pays the invoice at the end of the month.

● The Worker does not have to perform the tasks themselves, they can have people assist him (and this does happen on occasions and the Worker pays them direct) or they can sub contract the whole task to someone else as long as the task is completed on time and to the specifications as per the works/purchase order.

● The Worker takes out public liability insurance.

● The Worker can perform the task at whenever and at whatever time of the day or night they want, the only time the Principal is communicated with the Worker is either when there is an issue relating to the task that was not anticipated or at the final review stage. The Principal does not tell the Worker when or how to perform the task.

● The Worker does not identify themselves as someone associated with the Principal nor are they provided with clothing which displays the Principal’s name; these are provided and are required to be worn by staff of the Principal.

● The Worker works with another party to perform tasks together for the Principal and each invoice the Principal for their half of the task. This has been the case with every house lot completed by the Worker over the years.

● The Worker is required to pay their own income tax from their income and is not issued with a Pay-As-You-Go (PAYG) summary. They are also required to lodge their own Business Activity Statement (BAS).

● The Worker is allowed to perform work for other businesses or individuals other than the Principal.

● There is no written agreement between the Worker and the Principal outlining any employment arrangement between the two.

● The Worker has been performing tasks for the Principal for at least the last fifteen years.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 Subsection 12(1)

Superannuation Guarantee (Administration) Act 1992 Subsection 12(3)

Reasons for decision

Summary

1. The facts and evidence suggest that the Worker was your employee for the purposes of the SGAA under the expanded definition as set out in subsection 12(3) of the SGAA. Therefore the Principal does have an obligation to pay SG contributions on behalf of the Worker.

Detailed reasoning

2. 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).

3. 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.

4. 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.

5. 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.

6. 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

Is the Worker a common law employee of the Principal as defined by subsection 12(1) of the SGAA for the period 1 July 2016 to 30 June 2017 inclusive?

Common law employee

Terms and circumstances of the formation of the contract

7. 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.

8. 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

9. 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.

10. 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?

11. 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.

12. 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

13. 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.

14. 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

15. 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.

16. 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.

17. 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.

18. 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

19. 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.

20. 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.

21. 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

22. 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.

23. 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.

In your case

24. The Worker is a builder who commenced working for the Principal in approximately 2002. The Worker provides services to the Principal for around 16 weeks a year.

25. There was no written agreement between the parties. Because there is no written agreement which confirms the terms of engagement, we will take into consideration the verbal statements of both you and your representatives and the evidence provided.

26. The Worker has had an active ABN since 1 October 2002.

27. Paragraph 16 of SGR 2005/1 provides that a ‘person who holds an ABN may still be an employee for the purposes of the SGAA’.

28. We accept to conduct work as a builder, installing the relevant materials requires a certain skill and the nature of the skill implies that the Worker would be able – subject to be appropriately qualified – to make an independent career by selling that skill.

29. Further, in performing building work for a new home it would be envisaged that it would be difficult for one person to perform the required tasks, as such, we would assume that the Worker would have another labourer assisting. We have no evidence to confirm that this occurred.

30. Generally, where a Worker submits invoices for each job to the Principal, this would be consistent with operating their own business. Nonetheless, the issuing of invoices is not necessarily determinative of the nature of the relationship.

31. In this case, there are two workers who are engaged at the same time, and who invoice for their half of the work performed separately.

32. You have contended that the Worker secures jobs by providing a quote for each job, based on pre-arranged rates for particular tasks. The Principal will then order the materials needed and pay for them.

33. The Worker is then paid at the end of the month, once an inspection is made by the Principal and the job is finished to a satisfactory result. There is no communication between the Worker and Principal unless an unforeseen issue arises or the task has been completed. One job would typically take about two weeks to complete.

34. If there are any corrections that need to be made, the Worker must do this, and cannot make a claim against the Principal for extra costs.

35. In terms of the degree of control the Principal has over the Worker, in this instance the Worker is told where the work is to be performed, they are also told what work is to be done and is given a timeframe for the completion of the work. This suggests that the Worker has been integrated into the business of the Principal as an employee.

36. Paragraph 43 of SGR 2005/1 states the following with respect to the meaning of the phrase ‘the production of a given result’:

43. The phrase '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.

37. The right to delegate relies on there being a contract for a result rather than just labour.

38. As stated in paragraph 50 of SGR 2005/ 1, there is a distinction between an unlimited right to delegate tasks (contract and principal arrangement) and sharing or providing a substitute (employee and employer relationship). Specifically, paragraph 50 of SGR 2005/1 states:

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.

39. Based on the information provided, there have been no circumstances in which the Worker has delegated work to another person, other than your statement that this has happened on occasion in the past.

40. The Worker provides their own tools to undertake the work as well as a vehicle to transport them and their tools due to the constant change in workplaces.

41. Paragraph 51 of SGR 2005/1 states that an independent contractor will often carry their own insurance and indemnity policies. The Worker is required to obtain their own public liability and professional indemnity insurance. This indicates that the Worker bears the primary risk for any costs that arise from carrying out their services.

Our conclusion regarding the common law definition of employee

1. With respect to the relationship between the Principal and the Worker, the facts and evidence provided point to the conclusion that the Worker is a common law employee of the Principal.

1. As the facts and evidence indicate that the Worker was your employee under common law, we are not required to consider the extended definition in subsection 12(3) of the SGAA. However, in order to leave no doubt as to the Commissioner’s view of this matter, the extended definition has been considered and is discussed below.

Question 2

Was the Worker an employee of the Principal by virtue of subsection 12(3) of the SGAA?

Expanded definition of employee for Superannuation Guarantee (Administration) Act 1992 (SGAA) purposes

2. The expanded definition of employee within subsection 12(3) of the SGAA, 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.

3. SGR 2005/1 explains when an individual is considered to be an 'employee' under section 12 of SGAA.

4. 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

5. 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.

6. 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.

7. Based on the available facts and evidence, we consider that the Worker was paid primarily for their own labour and skills as a builder.

8. Further, there is no evidence that their remuneration was intended to cover any more than this as they were not required to supply any materials.

The individual must perform the duties themselves

9. As discussed earlier, based on the information provided, the Principal indicates that the Worker can delegate completely or partially their duties. In this instance, there has been no evidence provided that this indeed occurred.

Not paid to achieve a result

10. As discussed earlier, on balance we consider that the facts and evidence indicate that the Worker was paid for their skill and labour as builders.

Our conclusion regarding the expanded definition of employee

11. Accordingly, as the Worker does satisfy all three components of the expanded definition under subsection 12(3) of the SGAA, they meet the expanded definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion – overall

12. Upon considering of all the available facts and evidence, the Commissioner is satisfied that with respect to work performed for the Principal, the Worker does meet the definition of an employee for the purposes of the SGAA under the common law definition, also they do meet the expanded definition provided under subsection 12(3) of the SGAA.

13. Accordingly, the Principal does have an obligation to pay superannuation contributions for the benefit of the Worker under the SGAA.