Private ruling: Employee v independent contractor
Published: August 2013
Ruling period: 01/07/2012 - 30/06/2016
Date scheme commenced: 01/07/2012

Ruling: Q1: Does the arrangement between the entity and their service providers constitute an employee arrangement for the purposes of Section 12-35 of schedule 1 of the Taxation Administration Act 1953 (TAA). | A1: No

Relevant facts and circumstances: The Trustee for the entity are a commercial and domestic cleaning company. Sub contractors are a mix of trust entities as well as sole traders and partnerships. Primary tools of the trade (e.g. vacuum cleaners) are provided by the sub contractors. Consumables (e.g. chemicals & cloths) are provided by the contractor in most cases as a cleaning trolley remains at each major location in the cleaner's closet. Sub contracts are currently agreed to verbally and may change from week to week based on work required. Sub contractors have the power to decline a job request and /or sub contract the job to another themselves-this entitlement is explained verbally, there are no written contracts between the contractor and sub contractor. The company uniforms are worn by the sub contractors as representative of the contract holder only on contracts held by the company. Each sub contractor holds a current public liability insurance policy. Recipient created invoices are generated weekly and are based on the outcome of work, not the time worked. Sub contractors hold their own ABN's Sub contractors have their own accounts. The sub contractors hold their own contracts with other contractors. If the work is not completed to the standard required the sub contractors must return and fix the issues.

Relevant legislative provisions: Taxation Administration Act 1953 (TAA).

Reasons for decision: Detailed Reasoning - Issue 1: Employee vs. independent contractor | Detailed Reasoning - Question 1: Does the arrangement between the entity and their service providers constitute an employee arrangement for the purposes of Section 12-35 of schedule 1 of the Taxation Administration Act 1953 (TAA). | Summary: Based on an assessment of the relationship between the entity and the service providers, it has been determined that the service provider's status is that of an independent contractor. The determination has been reached by analysing the level of control the entity exercises over the service provide r s, whether they are engaged to perform services or a result, whether they are operating a trade or business of their own, whether the work can be subcontracted or delegated, and the level of risk that they bear in carrying out their work. | Detailed Reasoning - Detailed reasoning: In accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA), an entity is required to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that entity or another entity). The terms 'employee' 'salary' and 'wages' are not defined in the in the TAA, and as such, they are given their ordinary meaning. | Detailed Reasoning - Employee at common law: Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them, and by taking into account the key indicators expressed in the relevant case law. Taxation Ruling TR 2005/16 income tax: Pay as You Go - Withholding from payments to employees (TR 2005/16) provides guidance as to whether an individual is an employee or an independent contractor for the purposes of the PAYG withholding provisions. | Detailed Reasoning - Contract: As explained at paragraph 21 of TR 2005/16, contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor, and not 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. Further, 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 the 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. In Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd [2004] SASC 288; 2004 ATC 4933; (2004) 57 ATR 147 ( Roy Morgan ) the Full Court of the Supreme Court of South Australia considered whether interviewers engaged by Roy Morgan were employees or independent contractors in the context of pay-roll tax. A clause in the contract between the parties stipulated that the interviewers were independent contractors. However, in arriving at the decision that the interviewers were employees, the Court held that such a clause should not be regarded as confirmation of the status of the interviewers as independent contractors. As expressed at paragraph 16 of TR 2005/16, it can be difficult to discern the true character of an employment relationship from the facts of the case, as the intentions of the parties may be unclear or ambiguous, for instance, where the terms of the contract are disputed by the parties, or are otherwise in apparent conflict. In the present case, there is no contract between the entity and the service provider's, conditions are acknowledged verbally. The workers are referred to as sub contractors; this may not reflect the true nature of the relationship. Therefore, with due consideration of the above, a careful analysis of the key indicators, as developed by the relevant case law, will need to be undertaken in order to ascertain the true nature of the employment relationship. | Detailed Reasoning - Key indicators: The common law meaning of the term 'employee' was discussed by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16 ( Stevens v. Brodribb ): …it is the totality of the relationship between the parties which must be considered...the question is one of degree for which there is no exclusive measure. It is clear from the above case that there is no single test for determining the distinction between an employee and an independent contractor. Paragraph 7 of TR 2005/16 states that whether a person is an employee of another is a question of fact. The relationship is determined by examining the terms and circumstances of the contract between them, and having regard to the key indicators expressed in the relevant case law, which include the following tests: (a) Control; (b) Does the worker operate on their own account, or in the business of the payer? (c) 'Results' contracts; (d) Whether the work can be delegated or subcontracted; (e) Risk; and (f) Provision of tools and equipment and payment of business expenses. Each of these will now be looked at and applied to your situation. | Detailed Reasoning - Control: As discussed at paragraph 26 of TR 2005/16, the classic '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. In an employer/employee relationship, a common law employee is told not only what work is to be done, but how and where it is to be done. Paragraph 26 of TR 2005/16 elaborates by stating that: the importance of control lies not so much in its actual exercise, although it is clearly relevant, as in the right of the employer to exercise it. Paragraph 31 of TR 2005/16 discusses the case of Hollis v Vabu Pty Ltd (2001) 47 ATR 559 ( Hollis v. Vabu ). In that case, the fact that the couriers engaged by Vabu had little control over the manner of performing their work was an important factor leading to the conclusion that the bicycle courier in question was a common law employee of Vabu. Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ observed that: Vabu's whole business consisted of the delivery of documents and parcels by means of couriers. Vabu retained control of the allocation and direction of the various deliveries…Their work was allocated by Vabu's fleet controller. They were to deliver goods in the manner in which Vabu directed. In this way, Vabu's business involved the marshalling and direction of the labour of the couriers, whose efforts comprised the very essence of the public manifestation of Vabu's business. In addition to the above, as stated by Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 at 404: The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's orders and directions. As stated by Mason J in Stevens v Brodribb Mason at 9: A prominent factor in 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. It has been held, however, that the importance of control lies not so much in its actual exercise, although it is clearly relevant, as in the right of the employer to exercise it. Paragraph 29 of TR 2005/16 explains that while control is important, it is not the sole indicator of whether or not a relationship is one of employment. Nevertheless, as explained at paragraph 30 of TR 2005/16, control is still the number one indicia to be considered when determining the nature of an employment relationship. For example, it was recognised by Wilson and Dawson JJ in Stevens v. Brodribb (1986) 160 CLR 16 at 36 that: 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. In the present circumstances, the service providers are some-what controlled by the entity whilst they are performing their work. They wear the corporate uniform, and act in accordance with the entity's directions. Although the information provided does not specifically refer to the level of control that the entity can exercise over the service provider, based on the facts that have been provided, authority over the service provider, in the performance of their duties, resides with the entity. | Detailed Reasoning - Does the worker operate on their own account or in the business of the payer?: The integration test is primarily concerned with establishing whether the individual providing the service/s does so as an individual carrying on a business of their own or as an integral part of another's business organisation. Whether the worker operates on their own account or as part of a business of the payer is sometimes viewed as a consideration of whether the worker would be viewed by a third party as carrying on their enterprises as independent contractors and whether they could be expected to generate goodwill in their own right. In the case of Stevenson, Jordan and Harrison v. MacDonald and Evans [1952] 1 TLR 101, Denning LJ said: ...under a contract of service a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it. The 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 skill 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. The factors to be taken into account in deciding whether the integration test is satisfied include: · whether the relationship between the worker and payer is an ongoing one, · whether the worker's activities are effectively restricted to providing services to only one master, and · whether the worker will generally profit commercially from sound management in the performance of his or her tasks (that is, whether the worker is so inextricably integrated in the business' organisation that any benefit from the worker's performance would flow to the business organisation). In the present case, the service providers work on a week to week basis depending on the work available. When the work is completed, the service providers are paid by the entity for the outcome of work, not the time spent completing the task. All the service providers have their own Australian Business Number (ABN); they also complete their own business statements. The service providers are trusts, sole traders and partnerships, they provide their services to other entities and would therefore it would be the service provider that would profit commercially from sound management and performance of the tasks. The service providers are 'running their own business' and they have 'independence in the conduct of their operations'. They are contracted by the entity, who exercises a level of control over them whilst they are working. Therefore, as the service providers operate in their own business, it is an indication that they are engaged as independent contractors. | Detailed Reasoning - 'Results' contracts: If the substance of a contract is to 'produce a given result', it is a strong indication of not being an employee/employer relationship. As stated at paragraph 36 of TR 2005/16: The phrase '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 outcomes. Satisfactory completion of the specified services is the result for which 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. However, as elaborated at paragraph 39 of TR 2005/16, even where there is 'payment for a result' an employee/employer relationship has still be found, as detailed below: The High Court in FC of T v. Barrett & Ors 73 ATC 4147 at 4153 found that land salesmen, who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale, and who were remunerated by commission only, were employees and not independent contractors; The High Court in Hollis v. Vabu considered that payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries; and The Full Court of the Supreme Court of South Australia in Roy Morgan [2004] SASC 288 found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors. Paragraph 40 of TR 2005/16 states that the contractual relationship as a whole must still be considered in order to determine the true character of the relationship between the parties. In the present case, the service providers are sub contracted to carry out work; this may change from week to week depending on the available work. Recipient created invoices are generated based on the outcome of work not the time worked. These facts are indicative of an independent contractor. | Detailed Reasoning - Whether the work can be delegated or subcontracted: In accordance with paragraph 41 of TR 2005/16, the capacity to subcontract work is an important factor when determining whether an individual is an employee or an independent contractor. Paragraph 42 of TR 2005/16 states that if an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal) it is a strong indication that the person is engaged as an independent contractor. In the present case, the service providers have the power to decline a job request or delegate their job to another appropriately qualified person. These persons do not need to be known to the entity and the entity has no control over who the work is delegated to. This is an indication that the workers are likely to be independent contractors. | Detailed Reasoning - Risk: As discussed at paragraph 44 of TR 2005/16, in the case of Hollis v Vabu , where a worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, he or she is more likely to be an employee. Conversely, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of their work, and often carries their own insurance and indemnity policies. In the present case, the service providers have their own insurance and indemnity policies. The service provider is responsible for incomplete or unsatisfactory works and is required to fix any defects or unsatisfactory works. Therefore the service provider bears the risk of the costs arising out of injury or defect when carrying out their work; it is an indication that they are independent contractors. | Detailed Reasoning - Australian Business Number: As discussed at paragraph 9 of TR 2005/16, a person who holds an Australian Business Number (ABN) may, depending on the circumstances, still be an employee. The service providers have their own ABN. Taking into consideration the circumstances of the entire employment arrangement, the service providers are considered to be independent contractors. | Detailed Reasoning - Conclusion: On balance, the working arrangement between the Company and the sub contractors is considered to be that of independent contractors.