Edited version of private advice

Authorisation Number: 1052210563845

Date of advice: 29 January 2024

Ruling

Subject: Status of worker - superannuation guarantee

Question 1

Were the Workers who are engaged by the Principal, employees withing the ordinary or common law meaning for the purposes of subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the relevant period?

Answer

Yes.

Question 2

Were the Workers employees of the Principal under the expanded definition of an employee under subsection 12(3) of the SGAA for the relevant period?

Answer

Yes.

This advice applies for the following period:

1 September 2022 to 10 October 2023

The scheme commenced on:

1 September 2022

Relevant facts and circumstances

The Principal provides various support services to people in the community.

The Principal engaged the Workers to perform the support services under contractor agreements.

The Principal have provided the copies of contractor agreements, and copies of invoices issued by the Workers which were paid by the Principal. Under the contractor agreements:

•         The Workers will provide services set out in the position description.

•         The Workers are required to comply the policies and procedures of the Principal, and report to the Manager to ensure the progress and quality of service met the obligation of the role, responsibilities and duties of the position.

•         All the Intellectual Property Rights created by the Workers are assigned to the Principal.

•         The Workers will provide all materials, tools and equipment.

•         The Workers will maintain public liability insurance.

•         The Workers will provide an invoice to the Principal weekly show the hours the Workers provided services to each client.

•         The Principal will pay the billable hours invoiced by the Workers.

The Principal has advised that

•         The Workers performed the same type of support work as employees of the Principal.

•         The Workers performed their services in the Principal's office, remotely from home, or out on the road with the clients.

•         If the Workers did not perform their job properly, the Principal would suffer financial losses.

•         The Workers were not free to subcontract or employ others to perform the work.

•         If the Workers were unable to undertake the work, the Principal required the Workers to seek their approval before the Workers could ask other team member to take their work.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection12(1)

Superannuation Guarantee Administration Act 1992 subsection12(3)

Reasons for decision

Summary

The facts and evidence provided suggest that the Workers were common law employees of the Principal for the purposes of the SGAA under both the common law test and the extended definition as set out in subsection 12(3) of the SGAA.

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).

The Principal therefore has an obligation to pay superannuation contributions on behalf of the Workers.

Detailed reasoning

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. 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 (Personnel Contracting) 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.

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.[1] In Marshall v Whittaker's Building Supply Co,[2] 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."

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

Were the Workers who are engaged by the Principal, employees withing the ordinary or common law meaning for the purposes of subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the relevant period?

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.

It is noted that in the Decision Impact Statement - Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd 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.

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.

In the most recent decision of the High Court of Australia in Personnel Contracting 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.

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. Payment is often made for a negotiated contract price, as opposed to an hourly rate.

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.[3] 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.[4] 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

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.

Application

Nature of the business

The Principal provides various support services to people in the community.

The Principal engaged the Workers to perform the support services.

In your case

Terms and circumstances of the formation of the contract

In this case, the Workers were engaged via a written contract to provide services to the Principal. Specifically, the terms of the contractor agreements entered into with each Worker, provide an agreement, wholly in writing, and singed by the Workers and the Principal.

These contractor agreements contain the entire agreement and understanding between the parties on everything connected with the subject matter of these agreements.

Contractual arrangements contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole - that is, the parties cannot deem the relationship between themselves to be something that is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of a relationship is one of employment, the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker's status is that of an independent contractor.

Control

The Principal required the Workers to ensure compliance with the Principal's policies, procedures, and manuals. . Additionally, the Workers were to consistently demonstrate the Principal's values to ensure that they conformed 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.

A contractor typically is not specifically directed as to what work is to be done, how and where their work is to be performed.

Does the worker operate on his or her own account or in the business of the payer?

The Workers represented the Principal to provide services.

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

Generally, a contractor could conduct their own business using their skills and generate own goodwill in the execution of their services.

Results' contracts

The Principal paid to the Workers an hourly rate for the duration of their relationship. . This was a natural way to remunerate the Workers whose purpose was to provide their services as an integral and essential part of the Principal's business.

A contractor typically does not receive payment from a principal until they have completed the work which they were engaged to do.

Whether the work can be delegated or subcontracted

In this instance the Contractor Agreement did not include rights in respect of delegation. The Workers were compelled to do the work themselves, however they were able to ask other team member to take their work in consultation with the Principal's approval. In these circumstances there is no true delegation but rather an arrangement where the Workers had merely organised a substitution or shared the workload.

Generally, a contractor would have the unfettered right to delegate or sub-contract their work as they are engaged to achieve a result.

Risk, provision of tools and equipment and payment of business expenses

The Workers were required to provide, pay for, and maintain all their own tools, equipment and assets. The Workers also were required to maintain their own public liability insurance.

This would not occur in the case of an employment relationship, as employers are vicariously liable for their employees.

However, the totality of the relationship between parties must be considered.

Our conclusion regarding the common law definition of employee

With respect to the relationship between the Principal and the Workers, based on the terms of the contractor agreements and the facts provided, it is considered that the Workers were common law employees of the Principal.

Question 2

Were the Workers employees of the Principal under the expanded definition of an employee under subsection 12(3) of the SGAA for the relevant period?

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.

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.

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

•         there must be a contract (written or otherwise);

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

•         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 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.

In this case, the Workers were paid on an ongoing hourly basis, depending on the terms of their agreement.

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

The individual must perform the duties themselves

In this instance the Contractor Agreement did not include rights in respect of delegation. The Workers were compelled to do the work themselves, however they were able to ask other team members to take their work in consultation with the Principal's approval. In these circumstances there is no true delegation but rather an arrangement where the Workers had merely organised a substitution or shared the workload.

Not paid to achieve a result

The factors and the evidence indicate that the Workers were paid for their labour and not to achieve a result. They were paid on an hourly rate rather than at the completion of their services. This was a natural way to remunerate the Workers whose purpose was to provide their services as an integral and essential part of the Principal's business.

Our conclusion regarding the extended definition of employee

Accordingly, the facts and evidence indicate that the Workers satisfy all three elements of the extended definition 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 meet the definition of an employee, 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 has an obligation to provide superannuation support to the Workers in accordance with the SGAA for the period under review.

[1] 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]).

[2] (1963) 109 CLR 210 at [217].

[3] Hollis at [54]

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