Edited version of private advice

Authorisation Number: 1051522048494

Date of advice: 5 July 2019

Advice

Subject: Superannuation guarantee obligations

Question 1

Is the Worker considered your common law employee as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period 1 August 2016 to 31 March 2019 ?

Answer

Having considered the nature of the working relationship between the Worker and the Principal, it has been determined that the relationship is one of 'independent contractor' under both subsection 12(1) and subsection 12(3) of the SGAA 1992.

Question 2

Is the Worker your employee by virtue of subsection 12(3) of the SGAA?

Answer

We consider that the totality of the working relationship between the Principal and Worker to be an 'independent contractor' under both subsection 12(1) and subsection 12(3) of the SGAA 1992.

This advice applies for the following period:

1 July 2016 to 31 March 2019

Relevant facts and circumstances

This advice is based on the facts stated in the description of the scheme that is set out below.

Relevant legislative provisions

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

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

Reasons for decision

Summary

The facts and evidence suggest that the Worker is 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. You therefore do not have an obligation to pay superannuation contributions on behalf of the Worker.

Detailed reasoning

SGR 2005/1 (para 20) states that an employer must provide the prescribed minimum level of superannuation support for its employees (unless the employees are exempt employees) or pay the SGC.

Under section 12 of the SGAA, the expression 'employee' has both its ordinary (common law) and extended meanings.

Under subsection 12(1) of the SGAA, if a person is an employee at common law, that person is an employee under the SGAA. However, classification of a person as an employee for the purposes of the SGAA is not solely dependent upon the existence of a common law employment relationship.

Subsection 12(3) of the SGAA extends the definition of 'employee' to include a person who works under a contract that is wholly or principally for labour.

Labour includes mental and artistic effort as well as physical toil (SGR 2005/1, para 67).

Common law tests

Although the Courts have identified various factors to indicate the nature of the employment relationship, these factors are only ever a guide in determining it. It is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is working in the service of another (as an employee) or is working on his or her own behalf (as an independent contractor).

A clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract. Whatever the facts of each particular case may be, there is no single feature which is determinative of the contractual relationship. The totality of the relationship between the parties must be considered to determine whether, on balance, the Worker is an employee or independent contractor (Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16; (1986) 63 ALR 513 (Stevens v. Brodribb) at CLR 29; ALR 521) (Refer SGR 2005/1, para 25). This means the parties cannot deem the relationship between themselves to be something that it is not (Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179).

Significantly, there are many relevant facts and circumstances that are determinant of a true contractual relationship, some pointing to a contract of service, others pointing to a contract for services (Commissioner of Payroll Tax (Vic) v. Mary Kay Cosmetics Pty Ltd 82 ATC 4444; 13 ATR 360).

In deciding whether a worker is a common law employee, there are six main tests to consider.

1. The control test
2. The integration test
3. The results test
4. The delegation test
5. The terms of engagement test
6. The risk test

The common law tests have been applied, against the facts provided, to determine if the Workers were employees under common law.

The control test

The classic test for determining whether the relationship of employer and employee exists is the exercise of control over the manner in which the work is performed.

With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right to control (emphasis added).

The right to control versus actual control is particularly relevant in our circumstances where the nature of the employment requires a considerable degree of experience, knowledge or skill. In these circumstances, it is to be expected that the employer will leave the performance of the activity up to the Worker.

While control is important, it is not the sole indicator of whether or not a relationship is one of employment. The main features of the control test are the right to control:

·         how

·         when

·         where and

·         who is to perform the labour.

It is not necessary for the employer to exercise day to day control over the Worker. What is important is that the employer has the legal right of control. As stated by Dixon J in Humberstone v. Northern Timber Mills (SGR 2005/1, para 33);

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in performance of his work resided in the employer so that he was subject to the latter's orders and directions.

In Hollis v. Vabu, the majority of the High Court quoted the following statement by Windeyer J in Marshall v. Whittaker's Building Supply Co:

... the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.

Therefore the justices were concerned with the fundamental question of whether the Worker was operating their own independent business or was operating within Vabu's business.

The High Court in Zuijs v. Writh Brothers Proprietary Ltd (Zuijis) described the significance of control in the context of skilled employment where the nature of the work performed left little scope for detailed control:

What matters is lawful authority to command as far as there is scope for it? And there must always be some room for it, if only in incidental or collateral matters.

According to such case law, this test is considered the 'surest' guide as to whether there is an employer/employee relationship - a test of master vs servant, whereby the employer has the right to control the employee (whether or not that right is exercised). Therefore, the test of control is not necessarily found in an employee's special skills, even though there is very little room for direction by the employer. Rather, the test of control is found where the employer has the right to control, and this is more important than its actual exercise.

How this affects the Worker

The unsigned agreement stated under the heading 'Trial Period details' the 'Hours of Work' including ordinary hours of work required, shift details, and days required together with the hourly rate of pay. The Principal's Private Ruling Application response indicated that they did not prescribe the times of the performance of work for their workers.

The Principal responded by stating that 'The Worker maintains discretion and flexibility as to how work is completed (no set hours, can work remotely......). The Worker can set their own hours of work as long as they perform the services.'

The Principal's worker could, according to responses in their Private Ruling Application and online employee/contractor decision tool assign and/or delegate any part of their services. The Principal states that the Worker has complete autonomy in this regard by virtue of being able to 'delegate all, or some, tasks to another person and may employ other persons to perform the services.'

The Principal's worker's work was not directly supervised as the Principal said that the Worker maintains discretion and flexibility as to how their work is completed and uses their own initiative to achieve a result.

According to the Principal's contention, the Worker was engaged for their specific skills, qualifications and experience and these were required for programming workshops teachers and market stall vendors offered to the Principal's clients. As the Principal's business offers a 'creative venue that provides co-working, event spaces and photo studios', it appears that the Worker has been engaged to maintain workshop schedules, timetables and events calendars to coordinate the use of these spaces over time.

The Principal relies heavily on the contention that the Worker was independent in the way they developed their product resources. We view this essentially as the Worker lending their skills to best deliver these products in a way that allowed them an opportunity to provide their intellectual capacity to achieve their goals. This is an argument that supports more the view of their true independence rather than a defined right to control the Workers activities.

It's our view that the Principal does not retain the ultimate right of control over the Worker as they have broad latitude to develop programmed packages that coordinate all the different workspaces at the Principal's venue.

When considering the decisions in Dixon J in Humberstone v. Northern Timber Mills, Hollis v. Vabu and Zuijs v. Writh Brothers Proprietary Ltd and taking into account all the facts in this case, it can be concluded that the Worker held the ultimate authority to develop their resources.

In Hollis v. Vabu, the majority of the High Court quoted the following statement by Windeyer J in Marshall v. Whittaker's Building Supply Co:

... the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.

Therefore the justices were concerned with the fundamental question of whether the Worker was operating their own independent business or was operating within Vabu's business.

Our view is that the Worker was contracted within the Principals business as an independent business in their own right. They have their own website and Facebook page which describes their business as using community-minded spaces to provide a regular program of events with additional staff working for the organisation. At the Principal's place of business, they carried out their work within their own set hours up to a capped amount of hours and could work with other clients at the same time if required, indicating a high degree of independence in the relationship between the Principal and the Worker.

This lends weight to the argument that that the Worker was employed as an 'independent contractor' of the Principal.

The integration test

A significant factor in establishing the nature of the 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 otherwise known as the 'business' or 'integration' test.

In a contract of service, a worker is employed as an integral part of the business and under a contract for services, although a worker may do work for a business, the work is simply an accessory to the business and not integral (Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans 1952 1 TLR 101).

The 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 skill 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.

Activities or requirements of the Worker which may indicate his/her integration into the business include:

·         the hours spent working for the Principal during the term of the contract are equivalent to those of a full-time employee

·         the work is normally performed at the premises of the Principal

·         the work is performed using a substantial amount of the Principal's assets and equipment

·         inability to perform other work which gives rise to a conflict of interest

·         the individual's performance is monitored

·         the requirement to comply with the Principal's policies, guidelines or directions

·         the requirement to maintain dress standards, use uniforms or display signage

·         attending meetings on behalf of the Principal or representing the Principal's business

·         receiving training by the Principal.

As set out in SGR 2005/1, there are situations where, having regard to the custom and practice of the work, or the practical circumstances and nature of the work, 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 an employee. The weight or emphasis given to this indicator (as with all indicators) depends on the particular circumstances and the context and nature of the contractual work. All the other facts must be considered to determine the nature of the contractual relationship.

How this affects the Worker

The Worker provided a specialised and unique set of skills that ostensibly could not be provided by the Principal. The Worker provided their services using their own ABN, organisation's name and their own equipment. They set their own hours of work within a defined agreed capped amount as stated in the Principal's agreement.

The Worker used their skills and intellectual capacity to develop programming products assisting the Principal in more effectively running their own business by coordinating various event spaces for their clients use.

The Worker could delegate their tasks to others so long as those individuals had a like skillset and having the direct authority to do so.

The Worker supplying their own skillset is the core notion of whether the Worker is working within the business or is doing work for the business as an accessory to the business and not integral to it (Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans 1952 1 TLR 101).

The Worker has been employed by the Principal to use their skills to develop programmes that the Principal could not otherwise do. This is a service provided by the Worker that is promoted by their business which they supply to the market through public channels such as their dedicated webpage.

Therefore we support the assertion that the Worker is not integrated into the Principal's business as an employee would be.

The results test

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. The production of a given result is considered to be a mark of independent contractor status (World Book (Australia) Pty Ltd v. FC of T 92 ATC4327).

In a contract for services, the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the result for which the parties have bargained.

Conversely, under a contract of service, payment is not necessarily dependent on, and referable to, the completion of the specified services.

The meaning of production of a given result as referred to in World Book (Australia) Pty Ltd v FC of T refers to the Workers freedom to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome (SGR 2005/1, para 43). Results contracts describe traditional principal/independent contractor arrangements where a specific identifiable task is performed. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to the hours worked.

Having regard to the true essence of the contract, the manner in which payment is structured will not of itself exclude genuine result based contracts. For example, there are results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task, or may even be calculated on that basis, subject to reasonable completion times (SGR 2005/1, para 45).

While the notion of payment for result is expected with a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis v Vabu considered that the 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.

Therefore, the contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties.

How this affects the Worker

An unsigned agreement was provided by the Principal with the terms it was believed to be mutually agreed upon verbally between both parties to provide the Worker's services at the agreed fee of $35 per hour. The amount of hours to be worked was capped at 20 hours per week to perform unique work and the Worker invoiced the Principal for 15.5 hours per week over the last 6 months.

The rate of pay and hours to be worked appears to be set by both parties to engage the Worker to provide their expertise in fulfilling the Principal's desire to better coordinate the various venue spaces that they control. The Principal stated that the Worker 'can set their own hours of work as long as they perform the required services.' Further, the Principal stated that the Worker uses 'their own initiative to achieve a stated result.' The Worker could provide their own tools and equipment to help them achieve the mutually agreed result.

We consider that the Worker was free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. It is our contention therefore with the evidence on hand that this was a contract for services to produce a given result.

The delegation test

An unlimited power to delegate work is an important indication that the Worker is an independent contractor. Delegation is generally implied in a contract for services where the emphasis is on a result. However, delegation clauses are considered in the context of the contract as a whole to determine if they are consistent with the apparent essence of the contract or if they are merely self-serving statements.

Delegation is not simply the act of substituting one employee for another, shifting a task from one employee to another or the ability to swap shifts or request a fellow employee to perform some duties. It is the ability to subcontract or employ others to perform the work, or to assist the contractor in their business to perform the work contracted for.

The power to delegate or subcontract (in the sense of the capacity to engage others do the work) is a significant factor in deciding whether the 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.

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 an independent contractor. 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 an independent contractor (Refer SGR 2005/1, paras 48-50).

A capacity to delegate work indicates the Worker is an independent contractor. If the contract does not expressly require the Worker to personally perform the services, an independent contractor has the capacity to delegate or subcontract all (or some) of the work to others. This is because the emphasis in the contract is on the production of a particular result. The contractor is therefore responsible for remunerating the replacement worker.

How this affects the Worker

The Principal's response in the 'Private Ruling Application' indicates that the Worker could organise work tasks to be completed by another person as chosen by the Worker. It is not clear who would pay any delegated worker to the job but it is assumed it would have been the Worker trading under their own business name.

It is expected that they would remunerate any additional worker that was employed by them under this arrangement. Implicit in this arrangement is the fact that the Worker's skills and experience were unique to assist in designing and developing programming venue resources to optimise clients' usage and the Worker was free to determine how that programming resource could be delivered. Their skills and experience could only be transferred to another person if they also possessed like skills and experience to carry out the necessary work.

As was stated in the Results test, we consider that the Worker was free to employ their own means (such as third party labour, use their own plant and equipment) to achieve the contractually specified outcome. As it is our contention that this was a contract for services to produce a given result, the Worker could employ any mean they wished to achieve that result including delegating work to other workers.

On balance, it is the ATO's view that the Delegation test is indicative that there is an individual contractor relationship.

The terms of engagement test

Some conditions of engagement are intimately associated with employment and may therefore be persuasive indicators; For example:

·         provision of benefits such as annual, sick, and long service leave

·         provision of other benefits prescribed under an award for employees

·         payer prescribed times and location for the performance of work

·         remuneration in the form of a salary or wage

·         the Worker uses assets and materials provided by the payer or is reimbursed, or paid a compensatory allowance for expenses incurred in respect of use of own assets and materials

·         payer discretion within the boundaries of industrial relations laws in respect of task allocation and termination

However, this list is not exhaustive and there is not a standard set of conditions applicable to an employee and another (different) set applicable to an independent contractor. This was highlighted Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179 as follows:

...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.

How this affects the Worker

The Worker was contracted within the Principals business as an independent business in their own right using their own ABN.

They carried out their work within their own set hours as long as they were capped to the agreed 20 hours per week maximum time negotiated and agreed to between both parties as stated in the agreements. The Worker could work with other clients at the same time if required indicating a high degree of independence in the relationship between the Principal and the Worker.

The unsigned agreement states under 'Requirements' that the Worker is expected at their own expense to supply any equipment necessary to perform their services. This includes supplying their own smartphone, laptop, transportation and ABN.

The agreement does not have any provisions for benefits prescribed under an award for employees including annual, sick or long service leave. The Worker works under their ABN and business name and it is expected that the Worker would have their own arrangements covering these conditions.

The ATO accepts that the agreement establishes the working terms and conditions with a party engaged under contract to the Principal although it is only a verbal arrangement. It sets out the Worker's obligations and duties and provides a schedule of items for which the Worker agrees to work to. Under commercial law, once there is an agreement, intention or consideration present, an agreement will be binding whether or not both parties have read and understood the agreement's terms. The Worker's continued engagement to carry out 'programming' work for the Principal over the period under review demonstrates an implicit acceptance of the terms and conditions of the agreement on a verbal basis.

The ATO has examined the true substance of the relationship to determine the underlying reality of what occurred and measured it against the requirements of theSGAA and the Commissioners view of who is an employee as per SGR 2005/1.

When considering Re Porter: re Transport Workers Union of Australia and taking into account the working relationship in its entirety, it is our view that the Terms of Engagement test is indicative of an independent contractor working relationship.

The risk test

Where the Worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee.

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees. However, a Principal will not be liable for negligence or injury caused by an independent contractor.

The higher the proportion of the gross income of the Worker which is required to be expended in deriving that income, and the more substantial the assets which the Worker brings to the tasks, the more likely that the contract is for services, or that the contract is with an independent contractor.

The issue of risk concerns the matter where the Worker bears little or no risk of the costs arising out of remedying a defect in carrying out the work (SGR 2005/1, para 51).

How this affects the Worker

There is no reference in the agreement that states the Worker must indemnify and keep the Principal 'indemnified against any claim whatsoever against the Principal.' It is assumed that the Worker bore complete risk of costs arising out of injury or defect in carrying out their work under their own business arrangements and that they had to hold their own public liability, professional indemnity and workers compensation insurance policies which suggests that the Principal would not have been exposed to a commercial loss, as a result of any injury the Worker may have sustained, or for any liability for the cost of rectifying faulty work.

The Worker did take some risk in expending a proportion of their income by using their own transport to travel to the Principal's premises to derive their own income and they brought their own assets to assist in their work functions.

On balance, when considering the totality of the facts and evidence in this Risk test, it is the ATO's view that the working relationship between the Worker and Principal resembles an independent contractor arrangement.

Employee by extended definition

For the purposes of subsection 12(3) of the SGAA (SGR2005/1, para 11), 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 of delegation); and;

·         the individual is not paid to achieve a result,

the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

How this affects the Worker

In order to leave no doubt as to the Commissioners view of this matter, the extended definition has been considered as follows;

The Worker was classified by the Principal as a 'contractor' by using their specialised intellectual skills to help develop and implement programming products to help better integrate the separate venues used by the Principal. Their personal labour included their technical knowledge and own resources to help develop these programs for an agreed period of time and remuneration for that time up to a capped amount.

The Principal did not set the rate of pay. Rather, it was a joint agreement between the Worker as an independent contractor under their own business entity and the Principal that mutually agreed to a rate of pay up to a capped amount of hours per week. The Principal contends that the Worker issues fortnightly tax invoices for the required amount of time they worked per week and were remunerated accordingly at the $35 per hour rate.

The Worker is clearly being remunerated as a 'payment for a result' that is, delivering a program that effectively coordinated the Principal's events spaces within a set number of agreed hours and pay as would be expected under a contract for services.

We consider that the Worker was free to employ their own means (such as third party labour, plant and equipment) up to the agreed capped time to achieve the contractually specified outcome. It is our contention therefore that this was a contract for services to produce a given result.

Payments are made on a regular basis depending on the amount of time the Worker provided each week for their worker's ongoing service, to achieve a result. They brought their intellectual skills and experience to the contract and did not invoice for the use of any materials, assets or equipment used. The Worker did invoice the Principal for the amount of time they did work however.

The rate of pay and hours to be worked appears to be set by both parties to engage the Worker to provide their expertise in fulfilling the Principal's desire to better coordinate the various venue spaces that they control ie. achieve what the desired outcome or result was expected of the Principal.

The Worker was able to delegate work to others. The Principal expressly required the Worker to perform the work personally and if the Worker engaged an alternative worker, they had the scope to do so. This is considered delegation consistent with that exercised by an independent contractor and the ATO considers that the Worker did have the ultimate right to delegate the work.

On balance, the ATO considers the working arrangement between the Principal and their worker as being a contractual agreement principally for the skill and expertise provided by the Worker to achieve a given result and the relationship between the Principal and worker as being an independent contractor arrangement.

Conclusion

1.    A contract between the Principal and the Worker alludes to the relationship between the parties that is one of 'principal' and 'independent contractor.' However, clauses in a contract that intends to characterise the relationship between the parties as that of 'principal' and 'independent contractor' and not that of 'employer' and 'employee' must be considered with all the other terms of the contract.

2.    Such clauses cannot singularly receive effect if it contradicts the agreement as a whole. The totality of the relationship between the parties must be considered to determine the true relationship between the Worker and the Principal. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label and deem the relationship between themselves to be something that it is not. Subsequent conduct of the parties demonstrate the relationship has a character complimentary to the terms of the contract.

3.    On balance of the tests presented above, the ATO has concluded that the relationship between the Principal and the Worker is one of 'independent contractor.' The ATO has applied the facts of this case against the extended definition under subsection 12(3) of the SGAA. The facts support the view that the Worker has been principally employed for their skills and expertise to achieve a desired outcome under an 'independent contractor' relationship.