Edited version of private advice

Authorisation Number: 1051624691706

Date of advice: 17 January 2020

Ruling

Subject: Status of the worker

Question 1

Are the workers considered common law employees of the Principal under subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the period xx/xx/XXXX to xx/xx/XX?

Answer

No. Refer to 'why we have made this decision'

Question 2

Are the workers employees of the Principal under subsection 12(3) of the SGAA by virtue of working under a contract that was wholly or principally for their labour?

Answer

No. Refer to 'why we have made this decision'

This advice applies for the following period

xx/xx/XXXX to xx/xx/XX

This scheme commenced on

xx/xx/XX

Relevant facts and circumstances

We considered these to be the relevant facts

We received an application for administrative binding advice regarding the superannuation guarantee obligations for the Principal in respect of the workers. The application for administratively binding advice advised the following:

·         The Principal operates a business that sells digitised video products primarily to the corporate market in Australia.

·         The Principal has developed the products and sells them himself.

·         The Principal also engaged workers to assist in the selling of the product.

·         The Principal engaged the workers to complete specific tasks - i.e. sale of the Principal's products.

·         The services provided by each worker is sourcing sales contacts, contacting potential sales targets, to explain the contents of the video series and to complete the sale of the products.

·         The workers are responsible for devising their own sales strategy.

·         The manner in which the workers can undertake the work will be entirely up to them.

·         The workers were engaged through word of mouth.

·         The workers were first engaged in October 2019.

·         The workers are able to negotiate their pay rates and are paid differing commissions.

·         The relevant terms of the engagement of the workers by the Principal, according to the contract, are as follows:

-        The workers have their own ABN's which will be quoted on invoices.

-        The workers work their own hours which suit their schedule.

-        The workers use their own equipment.

-        The workers set their own directions and work at locations that suit them.

-        The workers are not required to perform services exclusively for the Principal and are free to work for others.

-        The workers will not represent themselves as an employee of the Principal's business.

-        The workers are free to delegate their role to someone else as long as that person has the necessary skills to undertake the work.

-        The workers' right to delegate is unfettered and does not require the Principal's approval.

-        The workers are responsible for paying the person to whom they have delegated to.

-        The workers are paid for a result or outcome only.

-        The workers are paid a commission based payment of agreed percentage of the total fee that is charged to the client. The commission based payment is a once-off payment only and the workers are not entitled to any trailing commission in respect of any clients who renew their licenses.

-        The workers are only entitled to raise an invoice once the Principal notifies them that a client has paid for the products.

-        Both the workers and the Principal can terminate the contract at any time for any reason whatsoever by providing 3 days' notice in writing.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

Reasons for decision

Why we have made this decision

Summary

The facts and evidence suggest that the workers are not employees of the Principal for the purposes of the SGAA under either the common law test or the extended definition as set out in subsection 12(3) of the SGAA. The Principal therefore does not have an obligation to pay superannuation contributions on behalf of the workers.

Detailed reasoning

The SGAA requires 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 extended 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 extended definition of employee under subsection 12(3) of the SGAA.

Question 1

Are the workers common law employees of the Principal under subsection 12(1) of the SGAA for the xx/xx/XX to xx/xx/XX?

Common law employee

In deciding whether an individual is a common law employee, there are a number of common law factors to consider. The common law factors we have considered are discussed below.

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, it must be determined 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.

Consideration may also be given to whether the worker could be expected to generate goodwill in their own right,

'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.

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'). 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.

In your case

The Principal mainly engages the workers through word of mouth. The Principal first engaged the workers in month/XX and there is a written agreement for this engagement. You stated that the workers are engaged to contact potential sales targets, corporate employers and/or individuals, promote sales of the Principal's digital video series and ultimately make successful sales of the product.

The workers invoice the Principal when they make a successful sale of the product to a client. The workers are only paid their commission once the Principal receives a full payment from the client. The workers are also able to negotiate their rates of pay and there are some workers offered differing commissions. The commission based payment is a once-off payment only and the workers are not entitled to any trailing commission in respect of any clients who renew their license. We consider that the workers are free to use their own means to achieve the contractually specified outcome. Based on the facts and evidence provided, it is our contention that the workers are engaged for their services to produce a given result.

The workers are responsible for developing their own sales strategy. The Principal does not supervise the workers or have any control over how, when and where they conduct their work. You stated that the Principal does not retain the ultimate right of control over the workers. This lends weight to the view that the relationship is one of principal and independent contractor.

You state that the workers never at any time represent that they work for the Principal or that they are employees of the Principal. The workers can work for others including a competitor who also provides similar digital video products. This indicates that the workers are not integrated into the Principal's business as an employee would be and can engage others to build their own businesses if they choose.

You contended that the Principal provides each worker with an unfettered right to delegate their work to others. Where any work is delegated, the workers are responsible for remunerating the person to whom they have delegated to. This is an argument in favour of the notion that the relationship between the Principal and the workers is 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 workers, the facts and evidence provided points to the conclusion that the workers are not common law employees of the Principal.

Please be aware that the overall common law employee test result is based solely on the facts considered for this advice. Therefore you cannot rely on the common law employee test outcome if the actual nature of the engagements differs to the facts.

Question 2

Are the workers employees of the Principal under subsection 12(3) of the SGAA?

Extended definition of employee for SGAA purposes

The extended 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.

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.

Based on the available facts and evidence, we consider that the workers are 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 do 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 workers are paid for a result.

Our conclusion regarding the extended definition of employee

Accordingly, as the workers do not satisfy all three components of the extended definition under subsection 12(3) of the SGAA, they do not 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 do not meet the definition of employees, for the purposes of the SGAA under both the common law test and extended definition as set out in subsection 12(3) of the SGAA. Therefore the Principal does not have an obligation to provide superannuation support to workers in accordance with the SGAA for the period under review.

Please be aware that this conclusion is solely based on the relevant fact considered for this advice. Therefore this advice will cease to apply if the actual nature of the engagements later turns out to differ to the facts stated in this advice.