Edited version of your written advice

Authorisation Number: 1051474731860

Date of advice: 19 March 2019

Advice

Subject: Superannuation guarantee

Summary

The facts and evidence suggest that the Workers were your employees for the purposes of the SGAA under both the common law test and the extended definition as set out in subsection 12(3) of the SGAA. You therefore have an obligation to pay superannuation contributions on behalf of the Workers.

Detailed reasoning

The SGAA requires 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 extended 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 extended definition of employee under subsection 12(3) of the SGAA.

Question 1

Were the Workers your common law employees under subsection 12(1) of the SGAA for the period 1 January 2008 to 30 June 2017?

Common law employee

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.

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, it must be determined 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.

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.

Consideration may also be given to whether the worker could be expected to generate goodwill in their own right,

‘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.

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'). 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

The Workers were engaged via a written contract for business services. The Principal did not control how the Workers conducted their classes. However, the Principal did require that the Workers conduct themselves according to the ‘Statement of Duties’

The High Court considered the question of ‘control’ in Humberstone v Northern Timber Mills (1949) 79 CLR 389 (Humberstone v Northern Timber Mills). Dixon J 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 the performance of his work resided in the employer so that he was subject to the latter’s orders and directions

While the Principal did not control how the Workers ran their classes, the Statement of Duties which outlines a code of conduct indicates that the Principal did have a right to control how a worker conducted themselves in the course of their work. The Principal organised class timetables and set procedures for the performance of work. Therefore it is considered that the ultimate authority over the Workers in the performance of their work resided with the employer.

Additionally, where a worker was unable to fulfil a contracted class, they were required to find another worker who was approved by the Principal. In the event that the worker was unable to find a replacement, the Principal would endeavour to find a replacement. The Principal was responsible for paying any worker who completed the class. The mere fact that a worker had to seek a replacement if they were unable to attend a scheduled class does not suggest that the Workers had the power to delegate their responsibilities. Additionally, any replacement worker was paid by the Principal for the hours covered.

Such payment method was recognised in McFarlane v. Glasgow City Council [2001] IRLR 7. In that case, it was held that gymnastic instructors engaged by the council were employees of the council, notwithstanding the fact that the instructors were obliged to find replacements when they were unable to take a class. One of the factors leading to this conclusion was that the replacements were paid directly by the council rather than by the instructors.

Therefore the replacement worker arrangement currently in place is in the nature of substitution rather than delegation which indicates the relationship is employee and employer relationship.

All equipment used by the Workers in the course of performing their role was provided by the Principal. This is consistent with an employee/employer relationship.

The fact that the classes were being held within your business premises means the work being performed would more likely benefit your business rather than the Worker. Bookings for classes were all organised by the Principal. The members may be attending the class for a particular teacher or they could be coming because they like the location and the facilities your business provides. Overall, there are indicators the Workers can be seen as representing the Principal’s business.

The Workers were paid a fixed sum upon completion of the class and they were not paid any other allowances. The payment of a fixed sum upon completion of the class does not necessarily mean the Workers were paid for a result. In regard to this, paragraph 46 of SGR 2005/1 states:

46. 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. The High Court in FC of T v. Barrett & Ors found that land salesmen, who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only were employees and not independent contractors. Likewise, the High Court in Hollis v. Vabu considered that 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. Further, the Full Court of the Supreme Court of South Australia in Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

Therefore the information provided indicates in more favour that the Workers were not engaged to produce a result.

You stated that the Workers must provide their own insurances. You also expect any student injured in a class through the fault of a Worker will seek redress directly with them. Therefore it could be seen as the Workers bear some of risks associated with the work performed.

However the Workers receive a set fee per class for work they perform. Where any substandard work was performed the result would be a loss of satisfaction by your customers. The level of attendance of a particular class would ultimately affect your profit rather than your Workers’. Members that do not have a good experience are unlikely to come back. However, the Workers would be paid the same amount for the class whether it was successful or not. Ultimately, the risk of loss for the Workers arises from your right to not offer them classes on your roster. This risk is analogous to the risk borne by a casual employee.

Information you provided indicates that you assumed more commercial risk and responsibility in relation to the classes run by the Workers. This is more in favour of the notion that the relationship between the Workers and the Principal is employee and employer relationship.

The Workers were required to provide an ABN, were not guaranteed classes and worked as required with many working for other businesses. The Workers were also required to hold their own indemnity insurance. However, it is considered that, based on the facts, the Workers were employees of the Principal and not independent contractors.

Our conclusion regarding the common law definition of employee

With respect to the relationship between you and the Workers, the facts and evidence provided points to the conclusion that the workers were common law employees of the principal.

Question 2

Were the Workers your employees under subsection 12(3) of the SGAA?

Extended definition of employee for SGAA purposes

The extended definition of employee within subsection 12(3) of the SGAA 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 worker was not paid primarily for their own labour and skills.

The individual must perform the duties themselves

As discussed earlier, we consider that the facts and evidence indicate that the worker did not 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 workers were not paid for a result.

Our conclusion regarding the extended definition of employee

Accordingly, the facts and evidence indicate that the Workers also meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Accordingly, as the Workers do not satisfy all three components of the extended definition under subsection 12(3) of the SGAA, they do not meet the extended definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

After considering all available facts and evidence relating to the working relationship between you 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 test and extended definition as set out in subsection 12(3) of the SGAA. Therefore you did have an obligation to provide superannuation support to Workers in accordance with the SGAA for the period under review.