Edited version of private advice

Authorisation Number: 1052141918690

Date of advice: 21 August 2023

Ruling

Subject: Superannuation guarantee - status of the worker

Question1

Are the Workers who are engaged by the Company, employees within the ordinary or common law meaning for the purposes of subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)?

Question 2

Are the Workers employees of the Company under the expanded definition of an employee under subsection 12(3) of the SGAA?

Answer

Answer to question 1

No

Answer to Question 2

No

Periods:

Income year ended 30 June 2023

Income year ended 30 June 2024

Income year ended 30 June 2025

The arrangement commences on:

1 July 2022

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are 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.

The Company is entering into a Facilities Agreements (FAs) with the Contractors, who engage the Workers. The Workers are the directors of both the Contractor and Company.

The FA includes a range of recitals.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection12(1)

Superannuation Guarantee Administration Act 1992 subsection12(3)

Reasons for decision

These reasons for decision accompany the Notice of advice for the Company, the Contractors and the Workers.

This is to explain how we reached our decision. This is not part of the advice.

Question 1

Are the Workers who are engaged by the Company employees within the ordinary or common law meaning for the purposes of subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)?

Summary

The facts and evidence provided indicate that the Workers are not common law employees of the Company for the purposes of subsection 12(1) of the SGAA.

Background

Under the SGAA, employers are required to make superannuation contributions into a complying superannuation fund or retirement savings account for the benefit of their eligible employees in accordance with minimum prescribed levels.

The definition of 'employee' for the purposes of the SGAA is found in section 12, which is both a clarifying and extending provision.

Subsection 12(1) of the SGAA states that 'employee' and 'employer' take on their ordinary or common law meaning.

Where the relationship between the parties to a contract is not a common law employment relationship, or there is doubt in respect of the status of a person, the expanded meaning of 'employee' is contained in subsections 12(2) to 12(11). Of relevance here is subsection/s 12(3).

Detailed reasoning

The Law

The relationship between an employer and employee is a contractual one. When a business 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[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.[2]

As such, the totality of the relationship is derived from the rights and obligations created by the contract[3] between the parties, construed at the time they entered into it.[4] 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.[5]

Evidence of subsequent conduct and work practices can only be considered in some instances, such as establishing the existence of a contract, identifying the contractual terms agreed to where the contract is wholly or partially oral, demonstrating that the contract has been varied or is a sham, and establishing evidence of other legal or equitable entitlements.[6] In these circumstances there is no need to consider evidence of subsequence work practices.

The examination of the totality of the relationship must be considered through the focussing question of whether the worker is working in the business of the putative employer, having regard to the various employment indicia from case law.[7] In Marshall v Whittaker's Building Supply Co,[8] Windeyer J said that the distinction between an employee and an 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."

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.[9]

Whether worker is serving in your business

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.[10] 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.[11]

Control

An employer is usually able to control how, where and/or when its employee performs their work. The importance of control in this context lies not in its actual exercise, but rather in the contractual right of the employer to exercise such control.[12]

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 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."[13]

A term in a contract that purports to confer a right to control must be interpreted in the context of the broader contract and the services being provided. A contract may afford an employer a different kind of control, such as control over how long a casual worker can work, or the clause may allow 'reasonable direction' as distinguished from a true right to control a worker.[14]

Other multifactorial elements considered are whether there is an agreement to achieve a specified result; tools and equipment; goodwill and intellectual property and risks.

Application

Nature of the business

The Company operates in a capacity of offering facility services to the Contractors.

In your case

Tripartite working arrangements

In this case the Company, the Contractor and the Worker were part of a tripartite working arrangement.

Superannuation Guarantee Ruling 2005/2 - Superannuation guarantee: work arranged by intermediaries (SGR 2005/2), which is currently under review, explains the Commissioner's view of how the definitions of 'employer' and 'employee' in the SGAA 1992 apply to contractual and working arrangements involving three (or more) parties.

SGR 2005/2 highlights that apart from providing a definition of employer and employee, the SGAA 1992 does not make any particular provision about employment and contractual arrangements effected through intermediary firms. The ruling provides the Commissioner's view as to how to analyse these situations in light of the principles of contract law and the relevant court decisions on these arrangements.

Paragraph 17 of SGR 2005/2 states:

17. If a worker is not contracted personally to perform work or services but via an interposed entity such as a company or trust, neither the end-user nor the intermediary is the employer of the worker, because any contract they have is with the interposed entity and not with the worker. The worker may be the employee of the interposed entity.

Under the Recitals to the Facilities Agreement, it is evident that the Workers are not contracted personally by the Company to provide their services.

Paragraphs 34-39 of SGR 2005/2 explains that an employment relationship cannot exist in the absence of a contract and that determining whether a contract exists is a matter of applying the ordinary principles of contract law.

One such question to be asked in a determination of whether a contract exists is to ask whom could the worker sue for breach of contract if they performed their work, but their remuneration was not paid to them?

We are advised that the Workers would be unable to sue the Company for breach of contract.

In conclusion, an examination of the tripartite working arrangement reveals that the Workers are not employees of the Company for the purposes of the SGAA.

Common law employee

As detailed above 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.[15]

As such, the totality of the relationship is derived from the rights and obligations created by the contract[16] between the parties, construed at the time they entered into it.[17] 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.[18]

In this case, the 3 parties to the FAs, the terms of which are not in dispute, are the Company, the Contractor, and the Workers. There is no specific agreement between the 2 parties, in the putative employer/the Company and the Workers.

The Company requires the Contractor to ensure compliance with policies, procedures, and manuals of the Company and additionally to ensure that the Worker conforms to the same standards of professional conduct as expected of persons performing similar roles with regard to such matters as behaviour, professional standards and ethics.

Fees generated by the Contractor are collected by the Company and the amounts, net of Company fees, are banked into the Contractor's nominated account. Effectively, this a payment made from one company to another company.

Paragraph 13 of Superannuation Guarantee Ruling 2005/1 - Superannuation Guarantee Ruling - Superannuation guarantee: who is an employee? (SGR 2005/1) states:

13. Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be the employee of the intermediary company or trust, depending on the terms of the arrangement.

It follows that under the FA, although the Workers are to some extent integrated into the Company's business they are actually employed and controlled by the Contractor. The Company does not have the contractual right to exercise control over the Worker.

Accordingly, it is considered that the Workers are not common law employees of the Company.

Question 2

Are the Workers engaged by the Company employees under the expanded definition of an employee under subsection 12(3) of the SGAA?

Summary

The facts and evidence provided suggest that the Workers are not employees of the Company for the purposes of subsection 12(3) of the SGAA.

The law

For a worker 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 works under that contract.

For the purpose of determining if a contract is wholly or principally for the labour of a person, it is useful to identify whether the terms of the contractual relationship indicate that:

•         the individual is remunerated (either wholly or principally) for their personal labour and skills

•         the individual must perform the contractual work personally (that is, where there is no right to delegate, or only a limited right), and

•         the individual is not contracted to achieve a result.

Wholly or principally for the person's labour

A person's labour can include mental and artistic effort, as well as physical toll.[19]

The words 'wholly' and 'principally' take on their ordinary meaning. The Macquarie Dictionary defines the word 'wholly' to mean 'entirely; totally; altogether; quite.' To the extent that a contract is partly for labour and partly for something else (for example, the supply of goods, materials or hire of plant or machinery), it will only meet the provision if it is 'principally' for labour. The word 'principally' is defined by the Macquarie Dictionary as 'chiefly; mainly.'

Benefit derived by the putative employer

The case of Dental Corporation v Moffet (Moffet) provides guidance as to determining whether the contract is wholly or principally for the labour of the individual engaged. Specifically, the question must be answered from the perspective of the person obtaining the benefit of the labour (i.e. the quasi-employer).[20]

In Moffet, Perram and Anderson JJ considered that the Services Agreement provided Dental Corporation, the putative employer, with two sets of benefits:[21]

"... One related to Dr Moffet's personal services as a dentist, as a practice manager, as a consultant both in relation to the administration of the practice but also in relation to fees and as a maintainer of medical records (i.e., the 'Dentistry Services' contained in Sch 1). The other was his promise that the practice would achieve a minimum cash flow which was backed up by a right in Dental Corporation to reduce his monthly drawings by 50% until any shortfall was made good."

Dr Moffet's obligation to provide personal services as a dentist and manager was 'for labour', whereas the promise to achieve the minimum cash flow was not.[22] The two benefits were so intertwined that they had to be dealt with together, where the requirement to provide minimum annual cash flows could not be met without Dr Moffet carrying out his services.[23] For that reason, the Services Agreement was, from Dental Corporation's perspective, wholly or principally for Dr Moffet's labour.[24] It was substantially for that purpose[25], notwithstanding that the contract also provided a secondary, non-labour benefit.

Contract for a result

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is not wholly or principally for the person's labour, but rather for the worker to produce the result they have contracted to produce. While the worker may perform labour, they do so for their own purposes to achieve the contracted result.[26]

A contract is for the production of a given result where the worker 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 wholly or principally to provide the worker's underlying labour that produces the result.

Where a worker uses a substantial item or piece of equipment for which they are wholly responsible to conduct their work, the contract may be better described as for a result that entails the specific use of the item.[27] In other circumstances, the contract may be for the sum of multiple components that involve both labour and equipment, but the use of the equipment is so significant that the labour is no longer principal. This contract would not be wholly or principally for the worker's labour even if it is not for a result.

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.[28] 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.[29] For example, in Commissioner of State Taxation v Roy Morgan Research Centre Pty Ltd (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.[30] In Hollis, it was considered that payment to the bicycle couriers per delivery was a natural means to remunerate employees whose sole purpose is to perform deliveries, for ease of calculation and to provide an incentive to more efficiently to make deliveries.[31]

As such the contractual relationship as a whole must still be considered to determine whether the legal rights and obligations in contract demonstrate an intention to wholly or principally engage labour to serve in the putative employer's business or to obtain a result.

Worker must perform the work personally

Subsection 12(3) requires the contract to be for the worker's labour specifically. An unlimited, unfettered power to delegate or subcontract to others to perform the work is usually an indication that the worker is not required to perform the work personally.[32] That is so even if the contractor actually does personally perform the work and had no intention of doing otherwise. Even if a contract is "for labour", an unrestricted delegation power indicates that the contract is not for the worker's labour.

Some contracts may provide a "limited or occasional" power of delegation where the scope and operation of the power is narrow and the worker cannot exercise it unilaterally, for example where the putative employer needs to provide consent before a subcontractor is engaged. The putative employer effectively has full control over who provides the services, and the contract more clearly contemplates that it would primarily be the worker who does the work. Thus, a limited delegation power may indicate that while the contract is not wholly for the worker's labour, it is still principally for their labour.

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.[33] 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.

The case in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) (On Call) entailed both of these circumstances. A purported power to delegate was found to be not any more than job swapping that can occur amongst casual employees, given the requirement that any replacement interpreter had be on the register and approved by On Call.[34]

Person works under the contract

The word 'work' in subsection 12(3) takes on its ordinary meaning. The Macquarie Dictionary defines 'work' as a verb to mean 'to do work, or labour; exert oneself.' Where a person has provided the agreed services in accordance with the contract, the person has worked under the contract.

Where a person has a right to delegation and has in fact delegated their work to someone else, it is less likely that the person has worked under the contract.

In your case

If an individual is found to be an employee for the purpose of the SGAA, SG obligations will only arise if payments to the employees are salary and wages.

The term salary or wages under the SGAA has an extended definition in Section 11. Paragraph 11(1)(ba) is the equivalent extended definition to subsection 12(3), to include payments:

•         Made under a 12(3) contract, and

•         Made in respect of the labour of the person

Whilst an individual may be an employee under the extended definition, there may not have been payments of salary or wages made to them within the extended definition in paragraph 11(1)(ba). If no payments of salary or wages have been made, then there is no superannuation guarantee obligation on the payments of the individual.

In this case the Company makes payments, after deducting their fees, to the Contractor. The payments are made at set intervals of one month and are not payments made to the Workers for their labour under the FA. Rather the Company is holding the Worker's money on trust to be passed on to them once the Company has deducted its fees. The Company does not pay salary and wages to the workers.

In conclusion the Workers are not employees of the Company under subsection 12(3) of the SGAA.

[1] Personnel Contracting [2022] HCA 1.

[2] Personnel Contracting at [61] and [172-173].

[3] Personnel Contracting at [60], [124] and [173].

[4] Personnel Contracting at [174].

[5] Personnel Contracting at [43], [59] and [173]; WorkPac Pty Ltd v Rossato [2021] HCA 23 at [56-57] and [63].

[6] Personnel Contracting at [54], [59] and [177].

[7] Personnel Contracting at [36-39], [61-62], [121], [173] and [183]. The relationship may be affected by statutory provisions and by awards made under statutes (Personnel Contracting at [41]).

[8] (1963) 109 CLR 210 at [217].

[9] Personnel Contracting at [34].

[10] Personnel Contracting at [181].

[11] Personnel Contracting at[39].

[12] Zuijs v Wirth Bros Pty Ltd [1955] HCA 73; 93 CLR 561 (Zuijs) at [571-573]; Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; 160 CLR 16 (Stevens) at [9] and [15-20], per Mason J.

[13] Personnel Contracting at[73].

[14] ZG Operations at[69] and [105].

[15] Personnel Contracting at [61] and [172-173].

[16] Personnel Contracting at [60], [124] and [173].

[17] Personnel Contracting at [174].

[18] Personnel Contracting at [43], [59] and [173]; WorkPac Pty Ltd v Rossato [2021] HCA 23 at [56-57] and [63].

[19] Deputy Commissioner of Taxation v Bolwell (1967) 1 ATR 862 at 873.

[20] Moffet [2020] FCAFC 118 at [96-97].

[21] Moffet at [100].

[22] Moffet at[101].

[23] Moffet at[103].

[24] Moffet at [104].

[25] Ibid.

[26] World Book at [4334].

[27] ZG Operations at [88]. See also Humberstone v Northern Timber Mills (1949) 79 CLR 389.

[28] For example, in Stevens.

[29] Hollis at [54].

[30] Roy Morgan (2004) SASC 288 at [42].

[31] Hollis at [4520].

[32] Australian Mutual Provident Society v Chaplin and Anor (1978) 18 ALR 385 at [391]. See also Neale (DFC of T) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419 (Neale) at [425].

[33] On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366 (On Call) at [105] and [253].

[34] On Call at [253].