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

Ruling: Q1: Are persons engaged by the entity considered contractors or employees? | A1: Contractors


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 engaged persons, described in the facts, are contractors and not employees. | 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, commissioner, 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, so that outside the contractor is free to exercise their own discretion, because they work for themselves. In this case, persons engaged by the entity exercise a high degree of control over the manner in which they provide the services. They exercise their discretion as to the method of providing the services to an appropriate standard. They use their own skill and experience to prepare and provide all necessary materials, and the entity relies on their professional experience and qualifications to do so. The entity does not provide any specific programs or direct engaged persons in what how they must provide the services. The entity has limited control over any of the engaged persons. The engaged persons are free to exercise their skills within the boundaries set by the entity. | 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, all engaged persons have specific skills which they carry on in their own right. The persons are engaged to perform a specific task and how they do that is basically up to them within the limited guidelines set by the entity. | 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, engaged workers are paid on an hourly basis on a regular basis. Engaged persons will be paid provided they have performed the service at the appropriate standard and met the conditions set out by the entity. Engaged persons are free to implement their discretion as to the method of providing the services to an appropriate standard, including the selection and use of appropriate learning strategies within the entity's boundaries. | 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. Engaged persons are free to engage subcontractors with the entity's consent. | 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. All engaged persons must agree to indemnify the entity against liability for all loss, damage or injury to persons or property caused for contributed to by them in the course of performing the services. The entity has the right to terminate the arrangement if it considers that a person's performance of the services is unsatisfactory or at the reasonable request of other interested parties. | 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. Engaged persons are responsible for any expenses incurred in the provision of the services as well as payments of GST in relation to the provision of services. They must also prepare and provide all necessary materials. | Detailed Reasoning - Conclusion: After assessing the facts against the indicators in TR 2005/16, it is considered that the engaged persons are independent contractors and not employees.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: Persons with appropriate qualifications and skills are engaged to provide services. | Persons engaged exercise a high degree of control over the manner in which they provide the services. They exercise their discretion as to the method of providing the services to an appropriate standard. They use their own skill and experience to prepare and provide all necessary materials. They are otherwise free to determine the hours that they work. | The persons are paid a monthly fee and any variance to this must be reflected on invoices. | They are also responsible for any expenses incurred in the provision of the services, as well as payments of GST in relation to the provision of the services. | The engaged persons are not engaged on an exclusive basis and are free to provide services to other organisations. | The entity is engaging the skills and expertise of the engaged persons who must refrain from assigning, subcontracting or delegating any of their rights or obligations as a provider of services to a third party without the entity's written consent. | The entity relies on the professionalism of each person to provide the appropriate services. The entity does not provide any specific programs or direct the persons in how they go about providing the services. | Under the terms of the agreement between engaged persons and the entity: | · Engaged persons are responsible for the payment of all group tax, PAYG, GST, superannuation and any other taxes, levies, deductions charges, duties, penalties or withholding taxes arising out of the provision of the tutoring services | · Engaged persons agree to be responsible for and indemnify the entity against liability for all loss, damage or injury to persons or property caused or contributed to by them in the course of performing the services. | · The engagement is not intended to be exclusive and engaged persons may accept any other engagement or employment by a third party during the term of the agreement which will not hinder or interfere with the performance of the services.