Private ruling: Employee v contractor
Published: November 2013
Ruling period: Year ended 30 June 2014 Year ended 30 June 2015 Year ended 30 June 2016 Year ended 30 June 2017 Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the people you engage considered to be employees for income tax purposes? | A1: Yes.

Relevant facts and circumstances: You are seriously considering purchasing a business which provides services to clients in their homes. You will engage people to work for you. The people will enter into a Service Contract with you. Under the Service Contract the person: · is to perform the agreed services · is described as an independent contractor and not your employee, agent, partner, joint venturer or representative · agrees to maintain an appropriate and legal business entity · keep current insurances · can delegate the work to a third party with your prior written consent · chooses if they wish to be paid on an hourly rate or a per visit rate · are required to submit an invoice to obtain payment · are paid by you · agrees to comply with your policies and procedures · agree to wear supplied branded clothing on visits · use supplied branded business cards, stationery · responsible for any claims against their work · are to indemnify you in respect of claims, demands, actions, proceedings, costs, losses, expenses and damages which are brought against you as a result of a breach of the Service Contract by them, · cannot carry on similar services whilst under contract without your permission, and · cannot carry on similar services within a defined period after termination of the Service Contract without your written permission A co-ordinator will contact each person to see if they are available to work particular shifts and then assign the available people to shifts. A person is not obliged to accept an offered shift. If a person cannot work a shift they can contact the co-ordinator and another available person will be rostered on. Alternatively, the person can arrange for another person to perform their shift. They will advise the co-ordinator of this. The original person receives payment from you and is responsible for paying the replacement person. People who wish to be paid on an hourly basis, are paid for the full time they are rostered on irrespective of the number of clients visited. People who wish to be paid on a per visit rate are paid for the number of visits they make during their rostered period. The person is driven to the visits by a driver who is your employee. The person supplies their own tools but is supplied with a bag by you.

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

Reasons for decision: Summary: It is considered that people who enter into the Service Contract and provide services are your employees irrespective of whether they are remunerated on an hourly or per visit basis. | Detailed Reasoning - Employee or contractor: Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from salary, wages, commission, bonuses or allowances you pay to an individual as an employee. The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service . Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services . An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result). In determining the nature of the contractual relationship, it is important to consider all the terms and conditions of the contract between the parties, whether express or implied, in light of the circumstances surrounding the making of the contract. Taxation Ruling TR 2005/16 discusses 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, and · which party provides tools, equipment and payment of business expenses. | Detailed Reasoning - Control: A 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 service. 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. | 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 payer's business but the work is not integrated into the business rather it is an accessory to it. In On Call Interpreters and Translators Agency Pty Ltd v. FC of T [2011] FCA 366; 2011 ATC 20-258 the Court examined the question of whether a person was an independent contractor in relation to the performance of particular work could be posed and answered as follows. Viewed as a "practical matter": (i) was the person performing the work an entrepreneur who owned and operated a business, and (ii) in performing the work, was that person working in and for that business as a representative of that business and not of the business receiving the work? If the answer was yes, in the performance of that particular work, the person was likely to be an independent contractor. If no, then the person was likely to be an employee. | 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 contracts to produce a result, payment is often made for a negotiated contract price, as opposed to an hourly rate. While the notion of 'payment for a result' is expected in a contract for services, it is not necessarily inconsistent with a contract of service. In Hollis v. Vabu (2001) 207 CLR 21; 2000 ATC 4508; (2001) 47 ATR 559 ( Hollis v. Vabu ) the High Court considered that payment to bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Further, the Full Court of the Supreme Court of South Australia in Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd [2004] SASC 288; 2004 ATC 4933; (2004) 57 ATR 147, found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors. | Detailed Reasoning - Delegation: The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contactor. 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 tor 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. | 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 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. | Detailed Reasoning - Provision of own 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 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 the use of their own assets such as a car. | Detailed Reasoning - Other indicators: In addition to the above, other indicators of the nature of the contractual relationship have been stated. Those suggesting an employer-employee relationship include the right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of benefits such as annual, sick and long service leave and the provision of other benefits prescribed under an award for employees. However, the fact that a contract does not contain provisions for annual and sick leave will not, in itself, be an indicator of a principal/independent contractor relationship. The requirement that a worker wear a company uniform is an indicator of an employment relationship existing between the contracting parties. In Hollis v. Vabu , the fact that the couriers were presented to the public and to those using the courier service as emanations of Vabu (the couriers were wearing uniforms bearing Vabu's logo) was an important factor supporting the majority's decision that the bicycle couriers were employees. | Detailed Reasoning - Application to your situation: After consideration of the information supplied and the terms of the Service Contract, it is considered that people who enter into the Service Contract will be employees for the following reasons: · you have a high degree of control over the people. Whilst they can choose not to accept an offered shift this is no different to a casual employee. Once a shift is accepted they are required to make themselves available for the full period and visit clients as bookings are made. A driver, who is your employee, will drive the doctor to the patient. · whilst a person has the freedom as to the manner in which they provide the services to the client this freedom is due to the nature of services being provided. · the people will be required to wear a branded uniform and conduct all work within your branding guidelines, including stationery, business cards, vehicles which indicates they are representing your business, and not a business of their own, when performing their duties under the Service Contract. · as the person will wear the branded uniforms and use branded stationery, they will be perceived by the general public as representing and working within your business. Any goodwill generated is goodwill for your business and not for the person, themselves. Therefore, the people are an integral part of the business. · without the people entering the Service Contract you are unable to provide the services, further strengthening the view that the people are an integral part of the business. · people are unable to provide the same type of service through another entity during the contract period or within 12 months of the contract being terminated. · whilst some people may choose to be paid on a per visit basis which may be viewed as being paid on a 'results' basis, the principles contained in Hollis v. Vabu can be applied. People in the profession are normally paid on a per visit basis as opposed to an hourly basis. · whilst a person may delegate their shift to another, they are required to obtained prior written consent from you. This makes delegation of work onerous and subject to your control. · whilst the people provide their own equipment this is standard for this profession irrespective of whether the person is an employee or contractor, and · the people are required to familiarise themselves with and comply with your policies and procedures. It is accepted that the people are required to hold their own insurances and indemnify you in respect of claims brought against you which arise directly or indirectly out of breach of the service contract, however, this is not sufficient to change the status of the people from employees to independent contractors.