Private ruling: Employee v contractor
Published: May 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the payee considered an employee of the entity? | A1: Yes


Relevant legislative provisions: Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision: Summary: Based on the information you have provided the Commissioner considers that the payee was an employee of the entity for the period of the engagement. | Detailed Reasoning - Detailed reasoning: Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee. A determination of whether an individual under a specific arrangement is an employee must be made by a consideration of the total factual circumstances in light of all of the indicators determining the status of that individual. It is the totality of the relationship that needs to be considered. Taxation Ruling TR 2005/16 considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term. These indicators include: · The control test: The degree of control which the payer can exercise over the payee. · The organisation or integration test: Whether the worker operates on their own account or in the business of the payer. · The results test: Whether the worker is free to employ their own means and is paid to achieve the contractually specified outcome. · The delegation test: Whether the work can be delegated or subcontracted (with or without the approval or consent of the principal). · The risk test: Whether the worker bears the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance. · Which party provides tools, equipment and payment of business expenses? | Detailed Reasoning - Control: The test for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done. The importance of control lays not so much in its actual exercise as in the right of the employer to exercise it. A high degree of discretion or latitude in the manner in which a task is performed does not, of itself, indicate a contract for services. Further, although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment relationship. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements any control or direction must be expressed in terms of the contract only, otherwise the contractor is free to exercise their own discretion, because they work for themselves. In this case the payee was engaged for a number of months. They were remunerated for hours worked. They were required to provide a report and timesheets on a weekly basis and was paid on approval of the report. The work undertaken by the payee was initiated by the entity. The scope of the work was outlined by the entity and the payee developed the specific tasks while consulting with the entity and prepared the final design and the work was directed by entity management. | Detailed Reasoning - Organisation or integration: In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance. An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payers business but the work is not integrated into the business rather is an accessory to it. In this case the payee was engaged to perform tasks and related services and assistance as required and directed. They provided their personal labour on an hourly basis. | Detailed Reasoning - Results: Where the substance of a contract is for the production of a given result, there is a strong indication that the contract is one for services. 'The production of a given result' means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result. In this case, the payee was engaged by the entity to utilise their specialised skills. They were engaged for a specific number of months and not on the completion of a project. The payee was paid for services provided on an hourly basis and not for a specific result. | Detailed Reasoning - Delegation: The power to delegate or subcontract 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. Whereas if an individual has unfettered power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. The contractor is free to arrange for their employees to perform all or some of the work or may subcontract all or some of the work to another service provider. In these circumstances, the contractor is the party responsible for remunerating the replacement worker. A common law employee may frequently 'delegate' tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this 'delegation' exercised by an employee is fundamentally different to the delegation exercised by a contractor outlined above. 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 workers have merely organised a substitution or shared the work load. This is not delegation consistent with that exercised by a contractor. In this case there was no requirement to delegate work to others as the entity arranged sub-contractors to work with the payee. | Detailed Reasoning - Risk: An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies. Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor. Commonly, an independent contractor or entity would solely bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense. An employee on the other hand, would bear no such responsibility and the liability for any defective work of the employee, either to a third party or otherwise, would fall to the employer in terms of the burden of cost or time for rectification. In this case the payee did not bear any risk. As stated in the agreement, the entity would hold the payee harmless for any liability which may arise under the purchase order. | Detailed Reasoning - Provision of tools and equipment and payment of business expenses: The provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor. However, the provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor. There are situations where very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work. Further, an employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car. In this case the entity provided: · Accommodation · Internet access however as per the agreement it was also required to supply computer and related hardware and software and internet connections · a fully serviced vehicle and fuel · appropriate safety equipment as and if required · a mobile phone or other communication requirements as and if required · other specific items not provided which were deemed necessary for particular activities | Detailed Reasoning - Conclusion: The payee was paid for the hours they worked including any overtime. The payee was not responsible for providing required equipment, the entity was (although they did use their own computer and software). They were only paid on the approval of a weekly report and the weekly submission of time sheets. The payee was engaged for their personal services. The agreement stated that a minimum and maximum number of hours per week were to be worked, consequently they were not paid for achieving a result. The payee did not take any commercial risks and could not make a profit or loss from the work they performed as they were paid by the hour. The payee had some freedom in the way in which their work was performed although they consulted with the entity management periodically. After assessing the facts against the indicators in TR 2005/16, it is considered that the payee was an employee and not an independent contractor for the period they were engaged by the entity.

Relevant facts: An agreement was entered into by the entity and the payee. | The service to be provided to the entity by the payee was for specific professional tasks and assistance as required and directed. | The engagement term was for a number of months and the payee was principally engaged for their labour. | The entity provided the scope of the tasks and the payee developed the detail of the tasks. The work was directed by the entity's management. | The payee was not required to wear the uniform of the entity. | The payee had full discretion in how the tasks were to be done however they consulted with the entity during the process. | The payee was required to complete a weekly report and timesheets during the term of the agreement. Invoices were to be issued fortnightly based on the approved weekly project report and actual hours worked. | The agreement outlined what the payee was to receive on an hourly basis for normal working hours and overtime. It also outlined the cost to the entity for sundry items such as airfares, hire cars etc. | The agreement also stated: | · What the minimum and maximum ordinary time hours per week were | · Accommodation was to be provided by the entity | · The entity was to provide computer and related hardware and software, including internet connections | · The entity was to provide a fully serviced vehicle and fuel | · The entity was to provide appropriate safety equipment as and if required | · The entity was to provide a mobile phone or other communication requirements as and if required | · The entity was to provide specific items not provided, but deemed necessary for particular activities | · Either party may terminate the agreement giving written notice to the other party with a number of weeks notice | · The entity also agrees to give the payee a number of weeks notice if the agreement is not to be renegotiated at expiry | · The entity will hold the payee harmless for any liability which may arise under the entity purchase order | · paid for accommodation plus electricity for the payee. | · provided internet access but the payee provided his own computer and software. | · provided a fully serviced hire vehicle for the payee to use. | · paid a living away from home allowance per day. | · paid for regular flights to the payee's home. | · provided an office out of which the payee worked | · provided a mobile phone for the payee to use for business purposes. | · provided internet access and the payee provided his own computer and associated software.