Edited version of private advice

Authorisation Number: 1052105077732

Date of advice: 2 May 2023

Ruling

Subject: Superannuation guarantee obligations

Question 1

Are the Consultants common law employees of The Company (the Principal) under subsection 12(1) of the Superannuation Guarantee Administration Act 1992(SGAA) for the period 1 July 20XX to 30 June 20XX

Answer

Yes.

Question 2

Are the Consultants considered the common law employees of the Principal under the expanded definition contained in subsection 12(3) and 12(8) of the SGAA for the period 1 July 20XX to 30 June 20XX?

Answer

Yes.

This advice applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The arrangement commences on:

1 July 20XX

Relevant facts and circumstances

The Principal has, and continues to, engage individual sole traders as contractors (the Consultants) to perform services for various entities within the broader Group.

During the period 1 July 20XX to 30 June 20XX the Principal entered into consultancy agreements (and subsequently varied agreements, called associate agreements) with various individuals, who were operating as sole traders.

In some instances, when the sole trader filled out the consultancy agreement, he or she inserted a business name under which he or she trades, which is owned by the individual. That individual is one and the same as the Nominated Person that will be engaging with the Principal in order to provide services to it.

Once engaged by the Principal under the consultancy agreement, as each new work assignment was presented to each sole trader, a project engagement confirmation (PEC) was signed. Where the services to be provided by each sole trader require the use of tools of trade and equipment owned by the sole trader, it is to be assumed that such equipment will not have a significant dollar value.

Relevantly, the Agreement contains the following terms:

•         The Principal engages the Consultant for a set period of time.

•         The Consultant must provide progress reports to the Principal.

•         The Consultant is responsible for providing all relevant tools, equipment and other assets necessary to deliver the Service, as well as all expenses incurred in the provision of Services.

•         The Consultant may not delegate the delivery of the Services except for an approved employee or sub contractor determined in agreement with the Principal.

•         The Principal will pay the Consultant's fees after receiving interim invoices from the Consultant.

•         The Principal is not required to reimburse the Consultant for any expenses incurred in the provision of the Services.

•         The Consultant must take out public liability insurance.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3)

Reasons for Decision

Question 1

Summary

The facts and evidence provided suggest that the Consultants are common law employees of the Principal for the purposes of the SGAA under the common law test.

Detailed reasoning

The SGAA requires that an employee 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 Superannuation Guarantee (Administration) Act 1992 (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 the Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? from a 'contract for service' which is typically a contractor and a 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 subsection 12(1) or 12(3) of the SGAA, their status is described as an independent contractor and there is no SG obligation. SGR 2005/1 is currently being reviewed in light of the decisions of the High Court in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2002] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2002] HCA 2 (Jamsek).

The ruling provides that the relationship between and employer and employee is a contractual one, and, is often referred to as a contract of service. Such a relationship is typically contrasted with the independent contractor/contractor/principal relationship that, at law, is referred to as a contract for services. An independent contractor generally contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result). An independent contractor works in their own business (or on their own account) while an employee works in the service of an employer.

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, the recent High Court judgements mentioned above have determined that the multifactorial approach causes uncertainty for both the parties involved and the courts and that it is more appropriate that we consider the totality of the relationship between the employer and the worker.

Accordingly, it is necessary to determine the true nature of the whole relationship between the principal and the workers, as to whether there is a common law employer and employee relationship, or whether the workers meet the definition of employee under subsection 12(3) of the SGAA.

In the most recent decision of the High Court of Australia in Personnel and Jamsek it was determined that the most significant clarification arises in primarily examining the terms of the written contract between the parties to establish the character of the relationship, where that contract is an accurate and accepted record of the agreement struck between the parties.

It is noted that in the Decision Impact Statement of Personnel that it is considered that a court can look beyond the written contract and consider the conduct of the parties in circumstances where:

•         the contact is an oral contract, or is partly written and partly oral to determine when the contract was formed and the contractual terms that were agreed

•         the terms of the written contract have been varied

•         the terms of the written contract have been challenged as invalid (for example, being a sham)

•         a party to the contract asserts rectification, estoppel or any other legal. Equitable or statutory rights or remedies.

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.

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.

In this case, the Consultants were engaged via a written contract to provide services to the Principal. Specifically, the terms of the Agreement entered into with each Consultant, signed by the Consultant and the Principal, provide an agreement, wholly in writing, and signed by the parties.

The Contractors are not specifically directed as to how their work is to be performed. They are required to provide, pay for, and maintain all their own tools, equipment and assets. They are required to maintain their own public liability insurance and are responsible for the provision of leave for their delegates.

However, the Contractors are paid an ongoing hourly or daily rate for the duration of their employment. A contractor typically does not receive payment from a principal until they have completed the work which they were engaged to do. Based on the facts provided, it is considered that the Contractors are, therefore, paid for their labour and not to achieve a result.

Furthermore, the terms of the Agreement expressly forbid a Consultant from delegating or sub-contracting their responsibilities without consultation with the Principal. Generally a contractor would have the unfettered right to delegate or sub-contract their work as they are engaged to achieve a result. While a principal may require a contractor to seek their approval before delegating, in this instance, a delegation may only be made in consultation with the Principal, who must approve the delegate/sub-contractor.

Furthermore, all intellectual property developed in the course of the project for which the Consultant has been hired vests in the Principal and not in the Consultant.

Consequently, based on the terms of the Agreement and the facts provided, it is considered that the Consultants are common law employees of the Principal.

Question 2

Summary

Having considered the nature of the working relationship between the parties, the Consultants are considered to be employees of the Principal under the extended definition of employee contained in subsection 12(3) of the SGAA. None of the roles meet the extended definition of employee under subsection 12(8) of the SGAA.

Detailed Reasoning

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) of 12(3) of the SGAA, their status is described as an independent contractor and there is no SG obligation.

SGR 2005/1 sets out the definition of subsection 12(3) of the SGAA, noting that the extended scope of the SGAA beyond the traditional employment relationships to consider some independent contractors who principally provide their own labour to meet obligations under a contract.

Where the substance of the contract is to produce a given result, there is a strong indication that the contract is one for services.

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 a person, the person is an employee of the other party to the contract.

For someone to be an employee under subsection 12(3) of the SGAA, three elements must be satisfied:

1.    there must be a contract (written or otherwise);

2.    which is wholly or principally for the labour of a person; and

3.    that person must work under that contract.

These three elements establish a framework to determine whether subsection 12(3) operates to make an individual an employee under the SGAA (Dental Corporation v Moffett [2020] FCAFC 118).

Paragraph 78 of the SGR 2005/1 states that where the terms of the contract, considering 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 work "principally" assumed it's 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.

In this case, the Consultants provide, and pay for, their own materials, tools and equipment to complete their job. The Consultants are paid on an hourly or daily basis, depending on the terms of their agreement.

Based on the available facts and evidence, it is considered that the Consultants are paid primarily for their own labour and skills.

The individual must perform the duties themselves

In this instance, the Consultants are only able to delegate their responsibilities in consultation with the Principal. This arises primarily from the fact that the Agreement expressly forbids delegation without consultation.

Not paid to achieve a result

The facts and the evidence indicate that the Consultants are paid for their labour and not to achieve a result. They are paid on an hourly or daily rate rather than at the completion of their services.

Conclusion

Accordingly, the facts and evidence indicate that the Consultants also meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Accordingly, as the Consultants satisfy all three components of the extended definition under subsection 12(3) of the SGAA, they meet the extended definition of employee as set out under subsection 12(3) of the SGAA.