Private ruling: Superannuation guarantee obligations
Date of advice: 16 August 2018
Published: October 2018

Ruling: Q2: Are the Workers employees by virtue of subsection 12(3) of the SGAA? Advice No. Refer to ‘why we have made this decision’

Relevant facts and circumstances: This advice is based on the facts stated in the description of the scheme that is set out below. ● The Principal wrote to the Commissioner requesting advice as to their superannuation guarantee obligations in respect of Workers it engages to provide services to its clients. ● The Principal operates a business in which it agrees to provide comprehensive services to clients at residential and commercial premises. ● The Principal charges a fixed monthly fee to its clients for its services. The amount of the fee is based on a number of factors including: (a) The scope and nature of any services provided by the Principal; and (b) The physical task required to be undertaken. ● The Principal provides the services to the clients. ● In some circumstances, the Principal engages independent contractors complete the task. ● The independent contractors engaged by the Principal comprise a mixture of individuals (the Workers), partnerships and companies. ● The Principal seeks out prospective Workers through word of mouth and advertisements in newspapers. ● The criteria used by the Principal when selecting a suitable Worker include: (a) whether the Worker has a good reputation and track record; (b) whether the Worker has specific skills required for the job; (c) whether the Worker is available to do the job; (d) whether the Worker has available staff; (e) whether the Worker is considered to be able to complete the work in the timeframe required and to the quality expected by the client; and (f) whether the Worker’s fees are considered to be reasonable. ● Prior to the engagement of a Worker, a senior manager has a meeting with the prospective Worker in which: (a) the Principal and the Worker negotiate the price to be charged by the Worker; and (b) the Principal explains the expectation of the quality of the services to be performed by the Worker. ● The Principal and the Worker then enter into a formal written contract. ● The relevant terms and circumstances of the engagement of the Workers by the Principal are as follows: (a) Upon agreement the Principal is liable to pay the Workers in accordance with the contracts; (b) The Principal pays the Workers an agreed lump sum per task. This amount is paid whether Workers take longer or less time to finish the task; (c) The Worker’s fees are paid on a regular basis provided an invoice has been received and verified by the Principal. For administrative convenience, payments to Workers are usually made each fortnight if an invoice has been received in that fortnight; (d) If a task is not completed in accordance with requirements of the contract between the Principal and a Worker, which is usually brought to the attention of the Principal by client dissatisfaction, the Worker must return to complete the task at no extra charge to the Principal; (e) Workers are entitled to sub-contract a task and this is done from time to time. Permission to sub-contract is not required from the Principal as the Workers are ultimately responsible for the task and the Workers will not receive payment if the task is not completed in accordance with the agreement. The Workers are responsible for paying any sub-contractors who complete work for them; (f) Workers are free to decline to undertake any tasks. There is no requirement for the Workers to give a notice of termination should they wish to not undertake tasks in the future; (g) The Principal does not provide any uniforms or identification badges indicating that the Workers have an association with the Principal; (h) All Workers must provide an ABN to the Principal before payment is made by the Principal to them; (i) Following the initial introduction by the Principal, the Workers and the clients will negotiate between themselves any adjustments to the time at which the task is to be conducted. (j) Workers are to hold relevant public liability and Worker’s compensation insurance policies to be given to the Principal prior to any work being undertaken by the Worker. Copies of renewed or updated policies are to be provided by the Worker as required; (k) The Workers supply all their own materials and equipment and own mode of transport with no reimbursement or allowance paid by the Principal for any expenses. ● The Principal provides the following further information in relation to the arrangement: ● None of the Workers work exclusively or primarily for the Principal. ● The Workers concerned provide the same services to other businesses similar to the Principal. ● The Workers are engaged by the Principal where demand for services exceeds what can be undertaken by the Principal’s employees. ● If there is a decline in demand from clients, the Workers will not be engaged. ● Workers work approximately 6 to 8 hours per week. ● In some months, Workers will not be engaged by the Principal at all. ● The Principal negotiates certain aspects of the service relationship with the Workers including the location of the job and a mutually acceptable rate/quote for the entire task. ● All other aspects of the service are determined by the Workers including: (a) The appropriate equipment and materials to be used to complete the job/task; (b) The manner and sequence in which the task is completed; and (c) The time taken to complete the task. ● The Workers fees are not based on time but on the result. Some Workers will be able to complete the job faster than others. However, the time taken to complete the job does not affect the remuneration paid by the Principal. ● The Principal is engaged by clients to provide comprehensive services. The Worker’s engaged by the Principal provide just one component of the overall service provided by the Principal to its clients. ● The Principal offers jobs on a specific assignment basis. Should a Worker refuse an assignment for any reason, the assignment will be offered to the next available contractor or Worker. ● The Workers do not use Principal’s business cards. There are not expected to comply with a dress code. ● The Principal does not reimburse the Worker in relation to any expenses they incur in undertaking the assigned tasks. ● Whilst the Principal and the Workers negotiate some aspects of the service, such as the fee, the expected standard of service and initial starting time, all other matters pertaining to the provision of the service are determined by the Workers. ● The fees charged vary depending on a number of factors, primarily the rate imposed by each Worker. ● The Workers are not, in any way, guided as to the manner in which they must perform the jobs or tasks. ● The Principal does not supervise or dictate any aspect of the task. ● The Workers are completely responsible for their own work and must fix any errors. ● If the services provided by a Worker do not meet the expectations of the Principal’s clients, then the Worker may not be engaged for future assignments. ● The Workers use their own equipment and vehicles to undertake the work. Any or all of the resources or tools required to perform the task are the sole responsibility of and are solely provided by the Workers.

Relevant legislative provisions: Superannuation Guarantee (Administration) Act 1992 Subsection 12(1) | Superannuation Guarantee (Administration) Act 1992 Subsection 12(3).

Reasons for decision: Summary: The facts and evidence suggest that the Workers are not your employees for the purposes of the SGAA under either the common law definition or the expanded definition as set out in subsection 12(3) of the SGAA. You therefore did not have an obligation to pay superannuation contributions on behalf of the Workers. | Detailed Reasoning - Detailed reasoning: The SGAA states 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). 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 expanded 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. 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, defining the contractual relationship between the employer and employee can be difficult and will depend on the facts of each case. 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 expanded definition of employee under subsection 12(3) of the SGAA. | Detailed Reasoning - Question 1: Are the Worker’s common law employees as defined in subsection 12(1) of the SGAA for the financial years ended 30 June 2018 to 30 June 2023 inclusively? | Detailed Reasoning - Common law employee: 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. We must determine the nature of the contract between the parties, consider whether the contract is written or verbal, and whether the terms and conditions are expressed or implied. These factors are important in characterising the relationship between the parties. When considering the intentions of the parties in forming the contract, the task is to decide 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. 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. ‘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. 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'). A person who has a right to delegate work (whether or not that right is exercised in practice) does not work under a contract wholly or principally for their labour. 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. | Detailed Reasoning - In your case: Both employees and independent contractors can be engaged by way of word of mouth or advertisements in newspapers. The fact that fees are negotiated, and that the Principal explains the requirements to the Workers are no more indicative of either an employment arrangement or a contractor arrangement. The Principal engages the Workers to provide cleaning services to its clients. The Principal instructs the Workers on what work is to be done, the location, being the client’s premises, and the general start time. The Principal does not instruct nor guide the Workers on how the work is done. It is at the discretion of the Worker to determine the appropriate equipment and materials to use and also the manner and sequence in which the clean is completed. Whilst the Principal controls where the work is to be completed, it is considered a common condition in the cleaning industry that Workers are required to complete their work at the location specified by the end client and this is considered a neutral factor in respect of control. The fact that the Workers can negotiate with the client as to the time the clean is to be conducted and the fact that the Workers make all decisions as to how the work is completed leads towards the conclusion that the relationship is one of principal and independent contractor. Furthermore, the fact that the Workers have the right to refuse work also indicates a contractor relationship. The Workers are able and, based on the information provided by you, do provide services to other business or other individuals indicates that the Workers are not integrated into your business. Rather, the information you have provided is more representative of the Workers providing services in carrying on their own business. The information provided indicates that the Workers are engaged to achieve a specific result and that the workers payment is dependent on the completion of the specified task. When the work is sub-contracted or delegated, the responsibility for the work must be borne by the Worker that has been engaged for the assignment. Furthermore, it is the responsibility of the Worker to pay any sub-contractors or any other person the Worker engages to complete the work. Based on the information provided, the provision of tools and equipment and the payment of business expense lies with the Workers. | Detailed Reasoning - Our conclusion regarding the common law definition of employee: With respect to the relationship between you and the Workers, the facts and evidence provided points to the conclusion that the Workers are not common law employee of the Principal. As the facts and evidence indicate that the Workers are not your employees under common law, we are required to consider the expanded definition of employee under subsection 12(3) of the SGAA. | Detailed Reasoning - Question 2: Are the Workers employees by virtue of subsection 12(3) of the SGAA? | Detailed Reasoning - Expanded definition of employee for SGAA purposes: The expanded definition of employee within subsection 12(3) of the SGAA, which 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. SGR 2005/1 explains when an individual is considered to be an 'employee' under section 12 of SGAA. 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. | Detailed Reasoning - 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 provide all the materials and equipment required to complete the task. The Workers are paid a set fee per task which includes remuneration for the materials, equipment and their labour and skills. Based on the available facts and evidence, we consider that the Workers are paid primarily for their own labour and skills as the tools required would be minimal. | Detailed Reasoning - The individual must perform the duties themselves: As discussed earlier, we consider that the facts and evidence indicate that the Workers do have the right to delegate work to others. | Detailed Reasoning - Not paid to achieve a result: As discussed earlier, we consider that the facts and evidence indicate that the Workers are paid for a result. | Detailed Reasoning - Our conclusion regarding the expanded definition of employee: Accordingly, as the Workers do not satisfy any components of the expanded definition under subsection 12(3) of the SGAA, they do not meet the expanded definition of employee as set out under subsection 12(3) of the SGAA. | Detailed Reasoning - Conclusion - overall: Upon considering of all the available facts and evidence, the Commissioner is satisfied that with respect to work performed for the Principal, the Workers do not meet the definition of an employee for the purposes of the SGAA under either common law or the expanded definition provided under subsection 12(3) of the SGAA. Accordingly the Principal does not have an obligation to pay superannuation contributions for the benefit of the Workers under the SGAA.

Are the Workers considered common law employees as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the from the period 1 July 2018 to 30 June 2023? | This advice applies for the following period: 1 July 2018 to 30 June 2023