Private ruling: Superannuation guarantee: Status of the worker
Published: April 2014

Ruling: Q4: Are workers retained by the principal under a letter as a casual worker considered employees as defined in subsection 12(3) of the SGAA for the quarters? Advice Yes, please refer to the Reasons for Decision

Relevant facts and circumstances: The Commissioner received a request for administrative binding advice from the principal with respect to the workers. This request included as the attachments the standard agreement and the standard letter.

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

Reasons for decision: Detailed Reasoning - Questions 1 & 2: Status of worker under Agreement: The facts and evidence suggest that the workers under the Agreement 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 do 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 prescribed minimum level of superannuation support for its employees (unless the employees are exempt employees) or they must pay the superannuation guarantee charge (SGC). The term 'employee', which is defined in section 12 of the SGAA, includes common law employees, and is also extended to include workers who are engaged under a contract wholly or principally for their labour. The employment relationship is often referred to as a 'contract of service'. This relationship is distinguished in Superannuation Guarantee Ruling SGR 2005/1 Who is an employee? (SGR 2005/1) from a 'contract for service' which is typically a contractor and principal type of relationship that does not attract any 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 extended definition of 'employee' in subsection 12(3) of the SGAA applies. 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 a difficult task and will depend on the facts of each case. Accordingly it is necessary to determine the true nature of the whole relationship that exists between the principal and their agents/workers, as to whether there is a common law employer/employee relationship, or whether the workers meet the extended definition of employee under subsection 12(3) of the SGAA. | Detailed Reasoning - Common law employee: The courts have developed a method for applying the ordinary, or 'common law' meaning of an 'employee'. Their approach is to look at a wide range of factors, which indicate whether a person is an employee. For example, if the employer provides the place of work, this might indicate an employment relationship, while the absence of holiday pay might suggest the opposite. The courts' decisions tend to be taken on balance, after considering the relevant factors. The common law meaning of the term 'employee' was stated by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16. It is clear from that case that there is no single objective test which will give the answer: …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. While various factors have been identified by the courts as indicators of the true nature of the relationship, those features are only ever a guide to answering that question. It is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is working in the service of another (as an employee) or is working on his or her own behalf (as an independent contractor). A clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract. 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 it is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. Subsequent conduct of the parties may demonstrate the relationship has a character contrary to the terms of the contract. In deciding whether the workers are common law employees of the principal there are a number of factors to consider. These factors are considered below. | Detailed Reasoning - 1. Terms 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. It might be argued that the parties' intention in forming a contract is not subjective, but an objective one; that is, the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Isaacs J in Curtis v. The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17: Where parties enter into a bargain with one another whereby certain rights and obligations are created, they cannot by a mere consensual label alter the inherent character of the relations they have actually called into existence. Many cases have arisen where Courts have disregarded such labels, because in law they were wrong, and have looked beneath them to the real substance. In Hollis v. Vabu (2001) 207 CLR 21 ( Hollis v Vabu ) the High Court determined that an indicator of an employer/employee relationship was that the workers were presented to the public and to those using the courier service as representatives of Vabu, as they wore uniforms bearing Vabu's logo. Additionally in Hollis v Vabu it was noted that although no payments of annual leave or sick leave were given, and no superannuation deductions were made in respect of the bicycle couriers, the relationship between the parties is to be found not merely from these contractual terms. The system which was operated there under and the work practices imposed by Vabu go to establishing the 'totality of the relationship' between the parties and it is this which is to be considered. | Detailed Reasoning - Application of the common law to your case: It is evident that the intention of the parties was that the nature of the relationship outlined in the Agreement would be characterised as principal/contractor. | Detailed Reasoning - 2. Control: A prominent factor in determining the nature of the relationship between parties is the degree of control which the employer has over the employee, as it goes to the root of the classical view of the master-servant relationship. The degree of control varies with the type of job, as the increasing usage of skilled labour has seen a consequential reduction in supervisory functions. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but rather whether they have the right to exercise it. Traditionally, a common law employee is told what work needs to be done, how it is to be done, and where it is to be done. However the mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship and a high degree of direction and control is not uncommon in contracts for services. It is not necessary for the employer to exercise day to day control over the worker. What is important is that the employer has the legal right of control. In Zuijs v.Wirth Brothers Pty Ltd (1955) 93 CLR 561 ( Zuijs ) the High Court articulated the significance of control in an employment relationship in the following way: 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. Additionally, Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 stated : 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 performance of his work resided in the employer so that he was subject to the latter's orders and directions. The right to control versus actual control is particularly relevant where the nature of the employment requires a considerable degree of experience, knowledge or skill. In these circumstances, it is to be expected that the employer will leave the performance of the activity up to the employee. In Hollis v. Vabu (2001) 207 CLR 21 ( Hollis ), where the decision was that bicycle couriers were considered to be employees, 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 consideration of the type of work performed by the workers and the skills they possessed, the Commissioner believes that telling the workers what was required to be done is a basic minimum of information required for them to determine whether they could/would accept the job, and did not amount to an exercise of control over how they were to perform the work. Due to the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it. 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 an individual in the performance of their work resided in the employer so that they were subject to your orders and directions. A payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract. However, the mere fact that a contract may specify in detail where the contracted services are to be performed does not necessarily imply an employment relationship, and a high degree of direction and control is not uncommon in contracts for services. While it is traditionally more indicative of an employer/employee relationship, the issue of seeking permission or providing prior notice for taking time off, is not especially conclusive in determining the true nature of the relationship. In an ongoing relationship between an independent contractor and principal, it is reasonable to conclude that a worker would need to provide adequate notice to the payer to organise a replacement if the work needed to continue In determining the nature of the working relationship between the parties, the Commissioner considers whether the principal had the ultimate authority to control, regardless of whether that control was exercised on a day to day basis. | Detailed Reasoning - Application of the common law to your case: It is considered that for the purposes of this test, the relationship between the principal and the worker is one of employee/employer. | Detailed Reasoning - 3. Integration: Another significant factor in establishing the nature of a contractual relationship at common law is to determine whether the worker's services are an integral part of the employer's business (under a contract of service as an employee) or providing services as an individual carrying on his or her own business (under a contract for services as an independent contractor). This is otherwise known as the 'business' or 'integration' test. 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 own enterprise as an independent contractor or operator and whether they could be expected to generate goodwill in their own right. In Montreal v. Montreal Locomotive Works [1947] 1 DLR 161, 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 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 Full Bench of the High Court in Hollis endorsed the proposition stated by Windeyer J in Marshall v. Whittaker's Building Supply Co (1963) 109 CLR 210 that 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. This factor was given significant prominence by the High Court as an aid to determining the common law contractual relationship between the parties to the dispute in the context of vicarious liability. In arriving at the conclusion that the bicycle courier was a common law employee of the courier company (which then became vicariously liable for the bicycle courier's negligence), Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ stated that, 'Viewed as a practical matter, the bicycle couriers were not running their own business or enterprise, nor did they have independence in the conduct of their operations.' 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. This was highlighted in Hollis at paragraph 48, where the court said in relation to bicycle couriers hired by Vabu: The couriers were not providing skilled labour or labour which required special qualifications. A bicycle courier is unable to make an independent career as a free-lancer or to generate any 'goodwill' as a bicycle courier… 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. | Detailed Reasoning - Application of the common law to your case: It is clear that the work performed by the worker is integral to the business operated by the principal. Consequently the Commissioner has decided that the results of this test are indicative of an employee/employer relationship. | Detailed Reasoning - 4. The 'Results' test: Under a results-based contract, payment is often made for a negotiated contract price, as opposed to an hourly rate. 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. Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. The production of a given result is considered to be a mark of independent contractor status ( World Book (Australia) Pty Ltd v. FC of T (1992) ATC 4327). 'Results' contracts describe traditional principal/independent contractor arrangements where a specific identifiable task is performed. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to the hours worked. In a contract for services (whether written, oral or implied), the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the result for which the parties have bargained. Conversely, under a contract of service, payment is not necessarily dependant on, or referable to, the completion of the specified services. While the notion of 'payment for result' is expected with a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis considered that the 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. Accordingly, the contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties and what the worker was hired to do. Generally where a worker is paid a set amount per task, this is a clear indicator of a contract for result, typical of a principal and independent contractor relationship. However, it should be also noted at this point that payment for result it is not necessarily inconsistent with a contract of service . Conversely, giving the nature of the industry a payment per completed file may be a convenient or natural way to measure and remunerate work performed by agents/workers (a piece rate basis). This is similar in nature to Hollis v. Vabu where bicycle couriers sole purpose is to perform deliveries. These types of arrangements are more common when engaging employees to perform work on a casual, non-full-time, basis. Additionally, a contract to achieve a specified result would generally be formulated on an individual basis. In his original decision, the Commissioner found that the workers were paid to achieve a result. | Detailed Reasoning - Application of the common law to your case: It is considered that the results of this test indicate that there is a principal/contractor relationship. | Detailed Reasoning - 5. Delegation: The unlimited power to delegate or subcontract work is an important factor in deciding whether the worker is an employee or independent contractor. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the Principal), this is a strong indication that the person is being engaged as an independent contractor. Delegation is generally implied in a contract for services where the emphasis is on result rather than person. However, delegation clauses are considered in the context of the contract as a whole to determine if they are consistent with the apparent essence of the contract or if they are merely self-serving statements. Delegation is not simply the delegation of tasks from one employee to another or the ability to swap shifts or request a fellow employee to perform some duties; it is the ability to freely subcontract or employ others to perform the work. | Detailed Reasoning - Application of the common law to your case: The Commissioner considers that the workers did have the right to delegate work to others. Therefore, the Commissioner considers that, with respect to the delegation test, the relationship between the principal and the workers is one of principal and contractor. | Detailed Reasoning - 6. Risk: Generally speaking, employers are vicariously liable for negligence and injury caused by their employees. However a principal will not be liable for negligence or injury caused by an independent contractor. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit), the more they are likely to be regarded as being independent. Typically, a worker who derives piece-rate payments and sustains large outgoings would be so exposed. The higher the proportion of the gross income of the worker which is required to be expended in deriving that income, and the more substantial the assets which the worker brings to the tasks, the more likely that the contract is for services, or a contract with 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. | Detailed Reasoning - Application of the common law to your case: The results of this test are inconclusive as to whether the relationship was employee/employer or principal contractor. | Detailed Reasoning - 7. Capital: A worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for his 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 pay and provide for their own assets, tools, equipment, maintenance costs and other expenses. As stated by McKenna J in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497 at 526, '…the ownership of assets, the chance of profit and risk of loss in the business of carriage are his and not the company's.' The investment of capital, the maintenance of capital and risk of loss of capital in the event of an unsuccessful venture must be of a significant nature to deem a worker not an employee. | Detailed Reasoning - Application of the common law to your case: The principal is providing the majority of the capital expenses, and this is consistent with an employee/employer relationship. | Detailed Reasoning - Conclusion - Common Law: With respect to work completed by the workers for you, the Commissioner has determined that the results of the common law tests are inconclusive in determining whether an employee/employer or principal/contractor relationship exists. Therefore it is necessary to determine whether the workers would be considered as an employee under the extended definition contained within subsection 12(3) of the SGAA. | Detailed Reasoning - Expanded definition of employee for SGAA purposes: The expanded definition of employee is provided 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. Based on the available facts and evidence, we consider that the workers are paid primarily for their own labour and skills. | Detailed Reasoning - The individual must perform the duties themselves: As discussed earlier, we consider that the facts and evidence indicate that the workers did 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, the workers do not satisfy all three 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 - Questions 3 & 4: Status of worker under standard letter as casual worker: It is considered that the intention of the parties was that the nature of the relationship outlined in the letter would be characterised as employee/employer for the purposes of the SGAA. In addition, as the worker: • is being remunerated (either wholly or principally) for their personal labour and skills; and • must perform the contractual work personally (there is no right of delegation); and • is not paid to achieve a result, the contract is considered to be wholly or principally for the labour of the individual engaged therefore the worker who is operating under the letter will be an employee for the purposes of the extended definition contained in subsection 12(3) of the SGAA 1992. | Detailed Reasoning - Conclusion - overall: Having considered the nature of the relationship between the principal and the workers and the relevant case law, and putting in balance the relevant indicators it has been determined that under the standard Agreement a common law employment relationship does not exist between the principal and the workers and that the workers would not be considered to be employees under the extended definition of employee contained in subsection 12(3) of the SGAA 1992. For the workers who are providing services under the letter it is considered that they are employees for the purposes of the SGAA and the principal has an obligation to comply with the SGAA in respect of these employees.

Question 1: Are the workers retained by the principal under the Agreement considered common law employees as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the quarters? | No, please refer to the Reasons for Decision | Question 2: Are the workers retained by the principal under the Agreement considered employees as defined in subsection 12(3) of the SGAA for the quarters? | Question 3: Is a worker retained by the principal under a letter as a casual worker considered a common law employee as defined in subsection 12(1) of the SGAA for the quarters?