Private ruling: Employee v Contractor
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the individuals engaged by the company considered to be contractors? | A1: No.


Relevant legislative provisions: Taxation Administration Act 1953 Section 12-60 of Schedule 1

Reasons for decision: Summary: Based on the information you have provided and having regard to the key indicators set out in the relevant case law, the Commissioner considers that individuals engaged by the company to provide their labour to third parties are employees of the company rather than independent contractors. | Detailed Reasoning - Detailed reasoning:: 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. 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. | Detailed Reasoning - The 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, right of control exists and that control is exercised by the company. Control over casual staff members exists in a number of ways. All staff members are told by the company where to go, when to be there, what their role will be, what they will wear and what their hourly rate of pay will be. Staff members are told what their actual day to day activities will be by the third party on commencement. Staff members submit time sheets and are paid for the hours worked. | 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 is an accessory to it. In this case, staff members work in the business of the company. The company's business is to supply labour for various purposes. The company tell staff members where to go, when to be there, what their role will be and what they will wear. Staff members have no discretion about how the work is done. It would reasonably be expected that a third party which viewed the current arrangement between staff and the company would consider the staff to be employees who work for an employer as opposed to them carrying on their own enterprise as independent contractors. | 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, it appears staff members are not paid for a given result. They are paid for their labour to do varied tasks for third parties. | 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. In this case it is in the nature of this industry which dictates that the staff member performs the tasks required in person and does not delegate those tasks to anyone else. | 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. In this case, the company pay Workcover insurance premiums to insure their staff while they are at work. Staff members are not required to insure themselves. Due to the type of work carried out, the question about whether a staff member is contractually obliged to accept liability for poor workmanship is not relevant in this case. | 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. In this case, there is no requirement for staff members to provide any tools, equipment or assets in order to carry out their duties, as they merely provide their labour. | Detailed Reasoning - Conclusion: After considering the indicators in TR 2005/16, it is the Commissioner's view that all staff engaged are employees and not contractors. | Detailed Reasoning - Further issues for you to consider: Section 12-60 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from a payment under a labour hire arrangement. Subsection 12-60(1) of the TAA in part states an entity that carries on an enterprise must withhold an amount from a payment that it makes to an individual in the course of furtherance of the enterprise if the enterprise is a business of arranging for persons to perform work or services directly for clients of the entity.

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: The company is a staffing business. The biggest part of its business involves providing the labour of individuals to third parties. | Staff members are told by the company where to go, when to be there, what their role will be, what they will wear and what their hourly rate of pay will be. Staff will be told what their actual day to day activities will be by the third party. | On initial engagement, all staff sign a casual employment contract and an employment declaration. | There is never an agreement between staff and any third party. Contracts only exist between staff and the company. | The company withhold tax (PAYG withholding), pay Workcover premiums and pay Payroll tax on behalf of their staff members.