Private ruling: Superannuation guarantee: Status of the worker
Date of advice: 11 January 2017
Published: June 2017

Ruling: Q2: Are the workers retained by the principal considered to be employees as defined in subsection 12(3) of the SGAA for the 2016-17 to 2020-21 financial years? Advice No. Refer to 'Why we have made this decision'.

Relevant facts and circumstances: The Commissioner of Taxation received a request for administrative binding advice from the principal with respect to the workers. This request included as attachments the standard written contract agreements (Agreement/s). Further information regarding the relationship was provided by telephone. Examples of invoices, submitted to the principal by the workers, were also provided.

Relevant legislative provisions: Superannuation Guarantee Administration Act 1992 section 12 | Superannuation Guarantee Administration Act 1992 subsection 12(1) | Superannuation Guarantee Administration Act 1992 subsection 12(3)

Reasons for decision: Summary: The engagement of the workers by the principal/payer does not satisfy the common law definition of employee pursuant to subsection 12(1) of the SGAA, or the extended definition of employee under subsection 12(3) of the SGAA. Accordingly, the principal/payer does have not an obligation under the SGAA to make superannuation guarantee payments on behalf of the workers. | Detailed Reasoning - Detailed reasoning: 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 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. | Detailed Reasoning - Common law employee: The relationship between an employer and employee is a contractual one. Such a relationship is typically contrasted with the independent contractor relationship. An independent contractor typically contracts to produce the contracted result in return for an agreed payment, whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result). The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts. As a result, a substantial and well-established body of case law has developed on the issue. Consideration should be given to the various indicators identified in judicial decisions. No list of factors is to be regarded as exhaustive and the weight to be given to particular facts will vary according to the circumstances. The totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or independent contractor. In deciding whether an individual is a common law employee, there are a number of common law factors to consider. The common law factors we have considered are discussed below. | Detailed Reasoning - 1. Terms of engagement: The fundamental task with respect to the terms of engagement test is to determine the nature of the contract between the parties. We will consider whether the contract is written or verbal and whether the terms and conditions are express or implied. These factors are important in characterising the relationship between the parties. 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. As per the observation made by Isaacs J in Curtis v The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17 which stated: 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. Application of the common law to your case Although providing services in accordance with the instructions of the principal is indicative of an employer/employee relationship, features such as not advertising for workers, not setting the amount that a worker should charge a customer and not paying superannuation and insurance are generally indicative of a principal/contractor arrangement. 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. However paragraph 32 of SGR 2005/1 recommends consideration of other key indicators as to whether an individual is an employee or independent contractor at common law as regarded by the Courts. These features are discussed below. | Detailed Reasoning - 2. Control: The extent to which the employer 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 lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it. Application of the common law to your case: The Agreement states that the workers must report to the principal and obtain their approval for certain actions. Also the principal has the capacity to instruct, direct, provide rules and make final decisions even to the extent of not allowing a worker to provide services to their client. This indicates the principal has the right to exercise significant control over the workers which suggests circumstances that are not in keeping with those of an independent contractor. However the right to supervise how work is to be performed does not necessarily constitute an employer/employee relationship. A high degree of direction and control can be common in contractor arrangements because the payer has the right to specify how the services are to be performed. The principal has advised that the workers are independent; decide their hours of work, run their own jobs, are able to accept or refuse work without recourse and don't have to ask for permission to take time off. These are not normal indicators of an employer/employee relationship. The factors as described suggest that the workers have ultimate control over whether they accept work or not which is indicative of a principal and contractor relationship. | Detailed Reasoning - 3. Do the workers operate on their own account or in the business of the payer?: If the worker's services are an integral and essential part of the employer's business that engages them, 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, they are an independent contractor. Indicators to be considered are: ● professional skills ● the benefits from the creation of goodwill, and ● whether the worker's services are an integral part of the employer's business. The provision of professional skills or skilled labour may imply that a worker is able to make an independent career and conduct their own business by selling that skill thus being an independent contractor. If the benefits from the creation of goodwill flow to the worker then this would indicate that they are an independent contractor. Alternatively, if goodwill flows to the principal, this suggests an employer/employee relationship. In relation to the distinction between a worker operating their own business and a worker operating in the business of the payer is based on whether the worker is running their own business or enterprise and have independence in the conduct of their operations or not. 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. This was highlighted in Hollis v. Vabu Pty Ltd 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… Application of the common law to your case: In this case the workers undertake their services from the premises of the principal. They are not required to attend staff meetings, wear a uniform or display the principal's logo and do not undertake any other duties for the principal. The workers can be contacted by customers directly or via the principal. Customers tend to be attracted by the professional skills of the workers rather than contacting the principal and accepting the services of anyone at the establishment. Also, although a certain amount of 'goodwill' is gained by the principal's establishment, the majority of goodwill is due to the workers skills. Overall, the Commissioner is satisfied that the integration test, in isolation, is more in favour of the notion that the relationship is one of principal and independent contractors. | Detailed Reasoning - 4. '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. 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. For example, the Full Court of the Supreme Court of South Australia in the decision of Commissioner of State Taxation v. Roy Morgan Research Centre Pty Ltd (2004) SASC 288 found that interviewers, who were only paid on the completion of each assignment not on an hourly basis, were employees and not independent contractors. It was found that the workers were paid for their time spent and labour, and not to produce a result. However 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. Generally, where a worker submits quotes or issues invoices for each job to the principal, this would be consistent with operating their own business. Nonetheless, the issuing of invoices is not necessarily determinative of the true nature of the relationship. Application of the common law to your case: In this case no allowances, holidays, sick pay or workers compensation were provided by the principal/payer. The principal/payer does not deduct income tax or pay superannuation for the worker. Copies of invoices show that the workers submit weekly invoices to the principal that list the names of the workers' customers for the week and a total figure payable. Accordingly the workers are paid when the contractual conditions, of providing a customer with a service, have been fulfilled. In this case the required result for the principal is that the workers will receive payment from satisfied customers so that the principal may deduct a percentage from the fee paid by the customer for the worker's services. The result for the workers is that the customer receives the requested service from the worker to their satisfaction. The workers are not paid if the customer is displeased or if the work is not done. This situation is not in keeping with an employer/employee relationship. The Commissioner is satisfied that the results test, in balance, is more in favour of the notion that the relationship is one of principal and independent contractors. | Detailed Reasoning - 5. Delegation: 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. If the contract does not expressly require the worker to personally perform the services, an independent contractor has the capacity to delegate or subcontract all (or some) of the work to others. Where the worker delegates, they are responsible for remunerating that worker. In the case of Neale (DFC of T) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419 at 425; 6 AITR 201 at 202, the High Court interpreted the words 'a contract which is wholly or substantially for the labour of the person to whom the payments are made' to decide that if a contract leaves a person completely free, if he or she chooses, to engage others to perform the work on his or her behalf means that the payments are not payments under a contract for labour. That is so even if the contractor actually does perform the work personally and had no intention of doing otherwise. If the contract leaves the contractor free to do the work himself or employ other persons to carry it out the contractual remuneration when paid is not a payment made wholly or at all for the labour of the person to whom the payments are made. It is a payment made under a contract whereby the contractor has undertaken to produce a result... 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. In the case of Bowerman v. Sinclair Halvorsen Pty Ltd [1999] NSWIRComm 21, Bishop J said: The fact that any substitute driver had to be approved by the company does not give the respondent [the ] control over that delegation… the company surely had the right to be confident that any substitute driver was competent to do the job and maintain the "integrity" of the company as Mr Coomb put it. 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. Application of the common law to your case: In this case the Agreement refers to 'personnel' as anyone engaged by the workers to provide services and states in section 4.5 that the workers may engage any person to assist them subject to the principal's written approval however this has never been raised in practice. Therefore, as per Neale (DFC of T) v. Atlas Products (Vic) Pty Ltd, the workers are free to engage others to perform the work on their behalf even if they normally perform the work personally and had no intention of doing otherwise. The fact that the principal allows delegation, and states in section 4 of the Agreement that 'approval shall not be unreasonably withheld,' indicates a level of autonomy beyond an average employer/employee relationship. Accordingly, we are satisfied that the delegation test in isolation is more in favour of the notion that the relationship is one of principal and independent contractors. | 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 service, or a contract with an independent contractor. As stated by McKenna J in Ready Mixed Concrete (South East) Limited v. Minister Pensions and National Insurance [1968] 2 QB 497 at 526: …the owner of assets, the chance of profit and risk of loss in the business of carriage are his and not the company's. 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. Application of the common law to your case: In this case the Agreement states that the workers are responsible for insurance, including workers compensation, and are required to provide evidence of same to the principal. Also the workers are responsible for any loss or damage to a third party or customer. The principal has also stated that they do not pay any insurance for the workers and, the workers are responsible for rectification of any unsatisfactory service provided. Carrying their own insurance and indemnity policies is an indicator that a worker is engaged as an independent contractor. In this case the risk of commercial loss or profit, for both the principal and the workers, is based on the quality of the services provided by the workers and the reputation gained by them. Although the principal's establishment may risk a loss should a worker develop a bad reputation, the principal has advised that they would terminate the contract of such a worker. Accordingly the risk of continued commercial loss is far less to the principal than to the workers. Consequently it appears that the risk is more substantially held by the workers. The Commissioner is therefore satisfied that the risk test, in isolation, is more in favour of the notion that the relationship is one of principal and independent contractors. | Detailed Reasoning - 7. Capital - Provision of tools and equipment and payment of business expenses.: 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 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 will seek separate payment for such expenses from the principal. In Stevens v. Brodribb at 36-37, the High Court observed that working on one's own account (as an independent contractor) often involves: The provision of him by his own place of work or of his equipment, the creation of him of goodwill or saleable assets in the course of his work, the payment by him from his remuneration of business expenses of any significant proportion… Application of the common law to your case: In this case the principal supplies floor space, a power supply and all equipment and facilities located within the premises for common use. The workers supply the equipment needed to provide their services and are not reimbursed by the principal for business expenses. The resources provided by the principal have a higher value than those supplied by the workers. However the equipment needed to produce the contracted result is mainly the responsibility of the workers and the workers could also conduct their services in different premises than that of the principal. Accordingly we consider that the workers' responsibility for tools and equipment to be more indicative of a principal and independent contractor relationship. | Detailed Reasoning - Our conclusion regarding the common law definition of employee: In conclusion, with respect to the relationship between the principal and the workers, the facts and evidence provided point to the conclusion that the workers are not common law employees of the principal. As the facts and evidence indicate that the workers were not employees under common law, we are not required to consider the extended definition in subsection 12(3) of the SGAA. However, in order to leave no doubt as to the Commissioner's view of this matter, the extended definition has been considered and is discussed below. | Detailed Reasoning - Expanded definition of employee for SGAA purposes: 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. | 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 were engaged for their artistic effort, skills and physical labour. Even though the workers were required to provide their own tools of trade and take full responsibility for providing the agreed service to customers, the payment is still 'principally' for the labour of the Workers. Accordingly the Workers are paid for their primarily for their labour and skills within the business of the Principal. | Detailed Reasoning - The individual must perform the duties themselves: The Agreement between the principal and the workers allows for delegation under certain conditions such as the workers must be responsible for insurance in relation to the personnel who must be suitably qualified and experienced. Therefore we consider that the facts and evidence indicate that the workers do have the right to delegate work to others. | Detailed Reasoning - Not paid to achieve a result: As discussed earlier, we consider that satisfactory completion of the specified service is the result for which both parties have bargained, and payment from the principal becomes payable when the contractual conditions have been met. In this case 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 facts and evidence indicate that the workers do not meet the extended definition of employee as set out under subsection 12(3) of the SGAA. | Detailed Reasoning - Conclusion - overall: After considering all available facts and evidence relating to the working relationship between the principal and the workers, the Commissioner concludes that the workers do not meet the definition of employees for the purposes of the SGAA under both the common law definition and expanded definition as set out in subsection 12(3) of the SGAA. Therefore the principal did not have an obligation to provide superannuation support to the workers, in accordance with the SGAA, for the period under review.

Question 1: Are the workers retained by the principal considered to be common law employees as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the 2016-17 to 2020-21 financial years?