Edited version of your written advice

Authorisation Number: 1051345183374

Date of advice: 5 April 2018

Ruling

Subject: Status of the worker

Question 1

Are the Workers, when engaged by the Principal, considered to be a common law employees as defined in subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

Yes. Refer to ‘Reasons for decision’

Question 2

Are the Workers employees of the Principal by virtue of subsection 12(3) of the SGAA?

Answer

Yes. Refer to ‘Reasons for decision’

This advice applies for the following period

1 July 2015 – 30 June 2018

This scheme commenced on

1 July 2015

We considered these to be the relevant facts

The advice is based on the facts stated in the description of the scheme that is set out below. If the circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it.

The fact sheet has more information about relying on ATO advice. You applied for a private ruling to determine whether the service provided by the Workers, is considered to be performed as employee or contractor and obligations in respect of superannuation guarantee in respect of the Workers.

The Workers use specific establishments including the Principal’s establishment to provide a service in relation to the performance of specific services.

The Workers provide these services at an agreed rate, depending on length of experience and types of training and qualification.

The Workers arranges replacement worker when they cannot provide the specific services themselves.

The Workers are engaged through word of mouth and through the relevant community.

The Workers provide their services to others without seek permission from the Principal.

Summary

The facts and evidence suggest that the Workers were employees of the Principal for the purposes of the SGAA under both the common law definition and the expanded definition as set out in subsection 12(3) of the SGAA. Therefore the Principal had an obligation to pay superannuation contributions on behalf of the Workers.

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? 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

Were the Workers common law employees of the Principal as defined in subsection 12(1) of the SGAA for the period from 1 July 2015 to 30 June 2018?

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 engaged the Workers by word of mouth and through the relevant community. The Principal engaged the Workers as specialist instructors to run classes at their studio. There is no formal contact or agreement in place between the Principal and the Workers. The Workers invoiced the Principal for their services at a fixed rate per class and provided their ABN on their invoices. The Principal stated that the Workers could renegotiate the rate if they achieve a higher level training at their own expense. The Principal also stated that they could terminate the agreement without notice if the Workers failed to perform their tasks. These terms of engagement indicate the relationship between the Principal and the Worker would be that of a principal and independent contractor. However as there is no formal contract in place, it is difficult to determine the true nature of the work engagement between the Principal and the Workers.

Based on the information provided by the Principal, the Workers could choose whether or not to take a class and could present the class without interference from the Principal. However they were still required to run their classes within the overall studio timetable. The Workers were not supervised but the Principal used the student feedback for any quality control. These facts would indicate that the Workers had more control of their work but the Principal still had some basic control over how the work should be performed.

The Workers were not required to wear a uniform or attend meetings in your business. You stated the Workers would provide details of their social media presence to the students if asked. We have also found evidence of some of the Workers working for other studios. While it is possible the Workers may not be seen as representing your business while conducting a class, the fact that the classes were being held within your business means the work being performed would more likely benefit your business rather than the Workers. Bookings for classes were all made via your website. The students may be attending the class for a particular teacher or they could be coming because they like the location and facilities your business provides. Overall, there are indicators the Workers can be seen as representing your business.

The Workers were paid a fixed sum upon completion of the class and they were not paid any other allowances. The payment of a fixed sum upon completion of the class does not necessarily mean the Workers were paid for a result. In regard to this, paragraph 46 of SGR 2005/1 states:

46. While the notion of ‘payment for a result’ is expected in a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in FC of T v. Barrett & Ors found that land salesmen, who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only were employees and not independent contractors. Likewise, the High Court in Hollis v. Vabu considered that payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Further, the Full Court of the Supreme Court of South Australia in Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

Therefore the information provided indicates in more favour that the Workers were not engaged to produce a result.

The Workers were responsible for arranging a replacement worker. The Principal set up a WhatsApp discussion group where all specialist instructors who have run classes at the Principal’s studio were invited. The discussion group was established for the purpose of facilitating the Workers finding suitable replacement instructors. The Principal only invited workers with appropriate level of training and insurance covers to the discussion group. The Principal also stated that the replacement workers invoice the Principal directly.

The method of arranging the replacement worker would appear to be substitution rather than delegation considering the method of payment. This is because the Workers choose substitute workers from the discussion group and the substitute workers instead of invoicing the Workers who then would pay them, invoice the Principal and the Principal pays the substitute workers.

Such payment method was recognised in McFarlane v. Glasgow City Council [2001] IRLR 7. In that case, it was held that gymnastic instructors engaged by the council were employees of the council, notwithstanding the fact that the instructors were obliged to find replacements when they were unable to take a class. One of the factors leading to this conclusion was that the replacements were paid directly by the council rather than by the instructors.

Therefore the replacement worker arrangement currently in place is in the nature of substitution rather than delegation which indicates the relationship is more of employee and employer relationship.

The Principal stated that the Workers must provide their own insurances. The Principal also expect any student injured in a class through the fault of a Worker will seek redress directly with them. Therefore it could be seen as the Workers bear some risks associated with the work performed.

However the Workers receive a set fee per class for work they perform. Where any substandard work was performed the result would be a loss of satisfaction by the Principal’s customers. The level of attendance of a particular class would ultimately affect the Principal’s profit rather than the Workers’. Clients that do not have a good experience are unlikely to come back. However, the Workers would be paid the same amount for the class whether it was successful or not. Ultimately, the risk of loss for the Workers arises from the Principal’s right to not offer them classes on the Principal’s roster. This risk is analogous to the risk borne by a casual employee.

Information provided indicates that the Principal assumed more commercial risk and responsibility in relation to the specialist classes run by the Workers. This is more in favour of the notion that the relationship between the Principal and the Workers is employee and employer relationship.

Our conclusion regarding the common law definition of employee

As the facts and evidence indicate that the Workers were employees of the Principal 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

Were the Workers 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 assessing whether a person has been remunerated wholly or principally for labour and skills the ATO view is that, in the context of subsection 12(3) of the SGAA the word ‘principally’ assumes its commonly understood meaning that is, chiefly or mainly.

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.

Based on the available facts and evidence, we consider that the Workers were paid primarily for their own labour and skills.

The individual must perform the duties themselves

As discussed earlier, we consider that the facts and evidence indicate that the Workers were not able to delegate if they could not complete a class but had to nominate a substitute instructor who was paid by you.

Not paid to achieve a result

As discussed earlier, we consider that the facts and evidence indicate that the Workers were not paid for a result.

Our conclusion regarding the expanded definition of employee

Accordingly, the facts and evidence indicate that the Workers also meet the extended 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 Workers, the Commissioner concludes that the Workers 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 the Principal did have an obligation to provide superannuation support to the Workers in accordance with the SGAA for the period under review.