Edited version of private advice

Authorisation Number: 1052078171254

Date of advice: 14 February 2023

Ruling

Subject: PAYG withholding - tutor

Question

Is the tutor an employee of the entity within the ordinary or common law meaning for the purposes of section 12-35 of Schedule 1 to the TAA?

Answer

Yes.

This ruling applies from:

The date of this ruling

The scheme commences on:

19 January 20XX

Relevant facts and circumstances

The entity is a not-for-profit incorporated association that provides classes.

The entity has a Conduct of Classes Agreement with the tutor.

The tutor will conduct classes (hereinafter referred to as 'the classes') at a designated venue.

The tutor agrees to:

a)    plan and prepare classes;

b)    consistently attend to teach the classes on allocated dates;

c)    arrive 10 minutes before class start time to setup and ensure Covid19 check-in occurs;

d)    ensure safe practice (including Covid19 safety plan) is explained and followed as outlined in the entity's Governance Manual - Codes, Policies and Procedures;

e)    professionally conduct classes in a respectful and considerate manner ensuring compliance with the entity's code of conduct;

f)     conduct classes for the full allocated time - currently 1 hour per class;

g)    unlock and lock up the venue ensuring security alarms are set as appropriate;

h)    report any incidents within 24 hours and provide an incident report if required;

i)      if unavailable to take a class the fee for that class will not be paid;

j)      if absent due to ill health, as soon as possible notify the entity;

k)    undertake conduct of classes from any new location if the class venue changes;

l)      assist with marketing and publicity events surrounding participant recruitment;

m)   acknowledge that the fee paid is as a contractor and the tutor is responsible for their own tax payments;

n)    provide invoices to the entity for payment of tutor fees.

The entity agrees to:

o)    arrange and manage enrolment of class participants;

p)    pay a fee to the tutor of $X a class. This amount will be paid by direct deposit to a nominated bank account within one week of receiving invoice's from the tutor following classes being taught. Invoices can be either weekly, fortnightly or monthly for the term;

q)    pay superannuation to the tutor's nominated fund at the legislative superannuation guarantee rate (10% to 30 June 2022 and 10.5% from 1 July 2022);

r)     accept responsibility for payment of venue hire;

s)    ensure maximum number of participants does not exceed safe capacity (including Covid19 maximum numbers) of venue;

t)     ensure that the entity's class participants and members have public liability and accident insurance cover;

u)    maintain up to date accident and public liability insurance that includes cover for the tutor whilst onsite teaching classes.

Relevant legislative provisions

Tax Administration Act 1953 Section 12-35

Reasons for decision

Detailed reasoning

Under section 12-35 of Schedule 1 to the TAA, an entity must withhold an amount from salary, wages, commission, bonuses or allowances its pays to an individual as an employee. The term 'employee' is not defined in the TAA takes its ordinary common law meaning.

The relationship between an employer and employee is a contractual one. When an entity engages a worker, generally it will either be a relationship of employment, often referred to as a contract of service, or a principal/independent contractor relationship that is referred to as a contract for services.

The leading case outlining the principles governing the ordinary meaning of 'employee' is Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contacting Pty Ltd [2022] HCA 1 (Personnel Contracting). The majority of the High Court in Personnel Contracting confirmed that whether a worker is an employee of a putative employer is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.

As such, the totality of the relationship is derived from the rights and obligations created by the contract between the parties, construed at the time they entered into it. Where the parties have comprehensively committed the terms of their relationship to a written contract, and the contract has not been varied, challenged as a sham or subject to legal or equitable relief, then it is the legal rights and obligations in that contract alone that are relevant in this analysis.

The central question is whether the worker is working in the business of the engaging entity, based on the construction of the terms of the contract, having regard to the indicia of employment identified in case law.

The common law indicia include the level of control exerted by the putative employer, the extent of integration of the worker into the business, whether the worker is able to delegate, whether the remuneration is for a specified result, whether the worker uses their own tools and equipment, whether either party generates goodwill and the level of risk borne by each party. Importantly though, the indicia are not to be applied as if they are a mechanical checklist.

An employee serves in the business of an employer, performing their work as a representative of that business. In contrast, an independent contractor provides services to a principal's business, but the contractor does so in furthering their own business enterprise and representing their own business.

A person is not excluded from being an employee just because they also conduct their own business. A person may realistically have more than one job and may both conduct their own business and be employed in someone else's business.

As such, it is helpful to focus attention upon the aspects of the contractual relationship which bear more directly upon whether the worker's work was so subordinate to the employer's business that it can be seen to have been performed as an employee of that business rather than as part of an independent enterprise.

The correct characterisation of the business being carried on by the putative employer is an essential part of determining whether the worker is working in the business of the putative employer.

Control

Where the main operating activity of the business is the supply of labour or a service of some kind, often a critical element of the business is the need to retain control over that labour or the workers providing the service. This was emphasised by Kiefel, Keane and Edelman JJ at paragraph 78 in Personnel Contracting:

"... the existence of a right of control by the putative employer over the activities of the putative employee serves to sensitise one to the subservient and dependent nature of the work of the employee, so as to assist in an assessment of whether a relationship is properly to be regarded as a contract of service rather than a contract for services."

Delegation

An unlimited, unfettered power to delegate or subcontract to others to perform the work is usually an indication that the worker is not an employee. That is so even if the contractor actually does perform the work personally and had no intention of doing otherwise. In contrast, where a person is contractually required to personally perform the work, this points to the person being an employee. Personal service is generally seen as a critical feature of an employment relationship, whereas a contractor having the ability to utilise their own workforce is consistent with carrying out their own business.

True delegation is differentiated from situations where the worker has delegated tasks in a supervisory capacity or has asked another colleague to take an additional shift or responsibility where the worker is unable to work. In these arrangements, the worker has merely organised a substitution or shared the workload. It is not the same as the freedom of an individual to subcontract or employ others to perform the work in their own business. A subcontractor is generally paid by the worker, reflecting that they work for the worker, whereas a substitute is usually paid directly by the putative employer, without the involvement of the worker.

Results

Under a results-based contract, payment is often made for a negotiated fixed price on completion of the job, as opposed to an hourly rate. The total fee may reflect an estimated completion time.

However, a piece rate or output-based remuneration can still be consistent with an employment relationship if they are a natural means to remunerate the particular kind of task the worker is performing. For example, in Commissioner of State Taxation v Roy Morgan Research Centre Pty Ltd (2004) SASC 288 (Roy Morgan), the Court found that although interviewers were only paid on the completion of each assignment, their pay was calculated by reference to their time spent, not for producing a result.

Tools and equipment

A worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for their work and be reimbursed for business expenses by the employer. This includes being given a reimbursement or allowance for the use of the worker's own assets such as a car.

In comparison, 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 will seek separate payment for such expenses from the principal.

Risk

Generally, employers are vicariously liable for negligence and injury caused by their employees. In contrast, a principal will not be liable for negligence or injury caused by an independent contractor.

Where a contract requires a worker to obtain their own insurance or indemnify the putative employer against loss arising from harm or injury caused by the worker, it may be seen as a consequence of a subjective characterisation that the contract is one for service, and as such must be considered in light of the entire contract.

In Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37, the Full Federal Court concluded although these workers were required to acquire their own public liability insurance, this one factor alone was insufficient to support a conclusion that the workers were not employees.

Conclusion

After assessing the facts against the above indicators, it is considered that the tutor is an employee, and there is an obligation on the entity to withhold from payments paid to the tutor.

When considering the employment indicia in this case it necessary to look at the activities carried on by the entity and if the tutor is engaged in those activities as an employee.

The entity engages the tutor for a specific task at a specific time and demonstrates a clear control over the tutor.

The tutor is paid an agreed fee for a set time period that is consistent with an employment relationship. The tutor is unable to delegate work to someone else and the entity is responsible for replacing a tutor that is unavailable. The entity is also responsible for maintaining up to date accident insurance and for payment of the venue hire.