Private ruling: Contractor v employee
Published: July 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is a tradesman's team who is engaged under the terms of your subcontract for services regarded as a contractor and not as employees? | A1: Yes.

Relevant facts and circumstances: Your contract states, in part; · This contract is between the corporate entity and the subcontractor. · The subcontractor may assign part of its obligations under this contract to another party only with the written approval of the corporate entity. · The subcontractor will be responsible for undertaking any checks and measurements of the base works and that it will do so in such a time as to comply with the construction schedule. Any inaccuracies in such checks and measurement will not result in any delays or claims for extensions of time or variations. · Upon checking and measuring the base work the subcontractor will use reasonable skill to identify any defects or other conditions of the base works that may affect the quality of the works and indemnities the corporate entity for failure to use reasonable skill. · The subcontractor must notify the corporate entity of any defects or conditions identified. Unless it notifies the corporate entity in writing promptly, the subcontractor will be deemed to accept the base works as suitable for the works. This responsibility remains in place until the works reach completion. The subcontractor must execute the works within the working hours: · Monday-Friday: 7am - 4pm · Saturday: 9am - 1pm · No work will be executed on Sunday. · The subcontractor is responsible for the care and protection of the works including unfixed materials and items until completion. Any loss or damage occurring to the works including unfixed materials or items other than damage caused by the corporate entity will be rectified by the subcontractor at its own cost. · The subcontractor must competently supervise the works and provide a person who is able to understand and take instructions from the corporate entity. · The subcontractor must keep the works clean and tidy and place all waste from the works in receptacles provided by the corporate entity at the end of each day (other than waste to be removed from the site as part of the works). · The subcontractor must provide everything necessary to execute the works and comply with relevant legislation and manufacturers' recommendations. This includes hoisting and labour to shift materials from delivery vehicles and around the site as required. · Should the subcontractor fail to comply with some clauses the corporate entity may at its discretion provide works, goods and/or supervision at cost to the subcontractor. In this case, the subcontractor indemnifies the corporate entity against error or negligence in supervision. · The subcontractor must not communicate with any architect or client of the corporate entity regarding the works unless directed in writing by the corporate entity to do so and then only in accordance with instruction from the corporate entity. · The subcontractor must notify the corporate entity in writing and seek instructions promptly if the subcontractor discovers a valuable item on the site. The subcontractor must take all necessary steps to avoid the removal loss or damage to any valuable item. The items remain the property of the registered proprietor of the site. · The corporate entity will not be liable for damage, loss or theft of the subcontractor's tools and equipment on the site. · Property and any materials or items intended for use in executing of the works will pass to the corporate entity upon delivery to the site. · The subcontractor must bring the works to completion by the completion date nominated in the last stage and notify the corporate entity of completion being reached. · The corporate entity will inspect the works upon such notification and give written notice to the subcontractor confirming completion is reached or listing requirements for completion to be reached. · The subcontractor is responsible for timely ordering, delivery and installation of all materials and items intended for use in executing the works. Any delays in the delivery of any materials or items will be the subcontractor's responsibility and it will not be entitled to claim a variation or extension of time for such delays. · The corporate entity may notify the subcontractor in writing of defects at any time from commencement of the works until the end of the defects liability period. The subcontractor must rectify any defects at its own cost.

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

Reasons for decision: Summary: The distinction between employment and contract is the difference between a contract of service indicating an employee/employer relationship and a contract for service indicating a contractor/principal relationship. The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship). The relationship between the independent contractor and the principal is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result). An independent contractor works in his or her own business (or on his or her own account); an employee works in the service of the employer, that is, in the employer's business. However, it is necessary to examine all the terms of the contract and to determine whether, on balance, the person is acting as an employee of another or is acting on his or her own behalf. Whether the true nature of an arrangement between a payer and payee is that of employer/employee or principal/independent contractor is a determination which must be made by reference to the various indicators developed by the Courts. These indicators have been collated in Taxation Ruling TR 2005/16. TR 2005/16 paragraph 7 provides: 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 having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered. The ruling has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law: | Detailed Reasoning - Conditions of Engagement: The terms and conditions of the contract whether express or implied, in the light of the circumstances surrounding the making of the contract, whether verbal or written, will always be of considerable importance to the proper characterisation of the relationship between the parties. Some Conditions of Engagement are closely associated with employment and may, therefore, be persuasive indicators. For example: · provision of benefits such as annual, sick, and long service leave; · provision of other benefits prescribed under an award for employees; · payer prescribed times and location for the performance of work; · remuneration in the form of a salary or wage; · the worker uses assets and materials provided by the payer or is reimbursed, or paid a compensatory allowance, for expenses incurred in respect of use of own assets and materials; and · payer discretion (within the constraints of industrial relations laws) in respect of task allocation and termination of engagement. However, this list is not exhaustive and it must be emphasised that there is not a standard set of conditions applicable to an employee and another (different) set applicable to an independent contractor. All the facts of each case must be examined to determine whether it is an employment or contractor relationship. Most conditions, when viewed individually, will be equivocal as indicators of the true character of the contract. | Detailed Reasoning - Control: The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, while control is important, it is not the sole indicator of whether or not a relationship is one of employment. In the case, Zuijs v. Wirth Brothers Pty Ltd (1955) 93 CLR 561 the High Court said: What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters. In the case, Humberstone v Northern Timber Mills (1949) 79 CLR 389, Dixon J stated: The essence of a contract of service is the supply of the work and skill of a man. Does the worker operate on their own account or in the business of the payer? Another significant factor in establishing the nature of a contractual relationship at common law is the issue of whether the worker operates on their own account or as part of the business of the payer. This is sometimes viewed as a consideration of whether the workers would be viewed by a third party as carrying on their own enterprises as independent contractors or operators and whether they could be expected to generate goodwill in their own right. In Hollis v Vabu , the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210; …the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own. In Montreal v. Montreal Locomotive Works (1927) 1 DLR 161 at 169 Lord Wright said: it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior. Similarly, in Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans (1952) 1 TLR 101 at 111 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. | Detailed Reasoning - Results test: Under a results based contracts, payment is often made for a negotiated contract price as opposed to an hourly rate. The production of a specified outcome or result is not limited to the performance of one individual. The worker 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. TR 2005/16 paragraph 37 provides: In contracts to produce a result, payment is often made for a negotiated contract price, as opposed to an hourly rate. For example, in Stevens v.Brodribb , payment was determined by reference to the volume of timber delivered, and in Queensland Stations where it was a fixed sum per head of cattle delivered. TR 2005/16 paragraph 38 further provides: Having regard to the true essence of the contract, the manner in which the payment is structured will not of itself exclude genuine result based contracts. For example, there are results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task, or may even be calculated on that basis, subject to reasonable completion times. | Detailed Reasoning - Delegation: If a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result. | Detailed Reasoning - Risk and rectification of work performed: Whether the worker is contractually obliged to be liable 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 bare the risk and responsibility of liability for their work if it is not up to an agreed standard and would be required to either rectify this defective work in their own time or at their own expense. This means that an independent contractor will often carry their own insurance and indemnity policies. An employee on the other hand would bare no such responsibility and the liability for any defective work of the employee, either to a third party or otherwise, would fall on the employer in terms of the burden of cost or time for rectification. | Detailed Reasoning - Provision of tools and equipment and payment of business expenses: Another consideration of relevance is whether the worker provides their own tools and equipment and pays their own business expenses. It has been held in a variety of cases that 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. There are situations where, having regard to the custom and practise of the work, or the practical circumstances and nature of the work, very little or no tools of trade or plant and equipment are necessary to perform the work. This fact alone will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this - or any other indicator - depends on the particular circumstances, the context and the nature of the contractual work. Unlike an independent contractor, an employee 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. | Detailed Reasoning - Pay As You Go: The subcontractor is not paid as an employee for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953. | Detailed Reasoning - Conclusion: With consideration of all the facts presented in this case and with reference to the indicators provided in Taxation Ruling TR 2005/16, it is clear that the subcontractor will be engaged by the corporate entity as an independent contractor and not as an employee of the corporate entity. You have no obligation for PAYG in relation to the subcontractor. | Detailed Reasoning - Further issues for you to consider: The Commissioner cannot rule on the requirements of the workers compensation matter as those requirements are stated in the Workers Compensation Act 1987 and this Act is not administered by the Commissioner of Taxation.

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