Private ruling: Superannuation Guarantee
Date of advice: 11 August 2017
Published: October 2017

Ruling: 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. | 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. This is also known as the integration test. | 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. | In your case (for all four scenarios) | When we apply the facts provided to the terms of engagement test we conclude the following:- | ● each contractor has their own ABN and remits GST on the fees paid by the company; | ● the company advertises for contractors and engages contractors; | ● the contractor is not entitled to entitlements such as annual leave, sick leave or long service leave; | ● the contractor is liable to pay public liability insurances; | ● the contractor is required to indemnify the company for their acts or omissions; | ● the contractor is not restricted from providing their services to other members of the public; | ● the contractor can take as much leave as they like so long as they find a replacement contractor and pay them accordingly. | Application of the control test to the facts provided indicate the following:- | ● the contractor controls their own scheduling of the work; | ● the contractor has control over when and how the tasks are performed; | ● the contractor does not have a specific timeframe to finish the work; | ● the contractor can take leave at their convenience; | ● the contractor can get other people to perform their duties; | ● the contractor can choose who should be their substitute whilst on leave/holidays. | By applying the integration test to the circumstances as outlined in the information provided it indicates the following: | ● the work is performed using a substantial amount of equipment owned by the worker; | ● in some circumstances supplies are provided by a third party that reimburses the company for the cost of those supplies; | ● all of the contractors are permitted to work for other people; | ● contracts are from 1 – 3 years and be can terminated by giving 30 days’ notice; | ● it is not compulsory to wear a company uniform but in some instances some contractors choose to do so (the company does not supply uniforms to all contractors); | ● contractors need to find their own substitute contractors when they want to take leave. | Application of the results test when applied to the facts provided:- | ● there is a written contract between the company and the contractor; | ● the contractor is paid a set amount for producing a result; | ● if results are not satisfactory the contract can be terminated by giving 30 days’ notice. | When applying the delegation test to the provided facts we can conclude the following:- | ● the contractor may delegate their provision of services to another party and are not personally required to provide the services; | ● when taking leave the contractor is required to find their own replacement and renumerate them for their services. | When we apply the facts provided to risk we can conclude the following:- | ● the contractor must pay for their own licences and registrations; | ● the contractor must take out their own insurance policy including public liability insurance; | ● the contractor is responsible for rectifying defects in their work; | ● the contractors are paid a set amount and bear commercial risk in relation to their services. If they take more hours in meeting the specifications outlined by the company, then they bear the profitability cost of doing so; | ● the contractors provide most of their own consumables and equipment; | ● a contractors services may be terminated by giving 30 days’ notice. | By applying the relevant facts of the case in regards to the provision of tools and equipment and payment of business expenses we can conclude the following:- | ● each contractor has their own ABN and remit GST on the fees paid by the company for their services; | ● the contractors are responsible for providing their own consumables and equipment needed to provide their services; | ● some contract caretakers may enter into multiple contracts which are independent of each other; | ● some contractors also provide caretaking services to members of the public. | The above review of the employee/contractor tests indicates that the relationship between the company and the contractor is not common law employees. It indicates to us that they are independent contractors. | As the facts and evidence indicates that the caretaker contractors are not your employees under common law, we are required to consider the expanded definition of employee under subsection 12(3) of the SGAA. | 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. | 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 contractors were not paid primarily for their own labour and skills. There is evidence to suggest that the remuneration was intended to cover more than this as the contractors were required to supply their own supplies and materials and incur significant business expenses such as insurances, licences and mobile phones. | The individual must perform the duties themselves | As discussed earlier, we consider that the facts and evidence indicate that contractors have the right to delegate work to others. | Not paid to achieve a result | As discussed earlier, we consider that the facts and evidence indicate that the contractors were paid for a result. | Our conclusion regarding the expanded definition of employee | Accordingly, as the contractors 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. | Conclusion - overall | Upon considering all of the available facts and evidence, the Commissioner confirms his original decision and is satisfied that with respect to work performed for the contractors does 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 company does not have an obligation to pay superannuation contributions for the benefit of the contract caretakers under the SGAA.