The ATO has been keen to use the expanded definition to take on employers. Therefore, it is important for business and practitioners to understand the broad definition to avoid problems with the ATO and the potential for fines and other costs.
Employee/employer defined
Section 12 of the SGAA defines an employee as follows:
(1)Subject to this section, in this Act, employee and employer have their ordinary meaning. However, for the purposes of this Act, subsections (2) to (11):
(a) expand the meaning of those terms; and
(b) make particular provision to avoid doubt as to the status of certain persons.
(2)…
(3)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.
Therefore, an employee/employer relationship exists beyond the ordinary meaning to include contractors engaged wholly or principally for their labour.
A relevant ruling
To assist businesses in understanding the distinction between an employee and a contractor, the ATO issued Superannuation Guarantee Ruling 2005/1 (SGR 2005/1). This sets out the Commissioner’s view on when a contractor falls within the expanded definition of an employee. The ruling sets out three principal tests when a contractor will be considered an employee. These are if they:
- are remunerated wholly or principally for their labour and skills
- perform the work themselves (with no right of delegation)
- are not paid to achieve a result.
The ruling notes that where an individual works through another party – such as a trust or a company – there is no employer/employee relationship between the individual and the other party for the purposes of the SGAA. However, the individual may be the employee of the intermediary or trust.
The recent case of On Call Interpreters (discussed later) sets limitations on the ability to rely on the use of interposed entities to circumvent what would otherwise be an employee/employer relationship for super guarantee (SG) purposes.
Some of the other factors to consider in determining whether a person is an employee or contractor include:
- the terms and conditions of the contract (both implicit and implied terms)
- control of performance of work to be done
- integration with business operations
- results test
- the right to delegation
- who is the bearer of risk
- the provision of tools and equipment.
What the courts consider
Among the first things to be considered by the courts are the terms and conditions of employment. This involves more than just the words used in a contract, so merely labelling a person a contractor does not necessarily make them one.
The courts will always interpret the terms and conditions in light of the whole relationship.
Another test is whether the worker has some control over where, when and/or how they work. Generally speaking, an independent contractor has greater control over how and by whom the work is done, and when that work has to be completed. The greater the
level of independence, the more likely it is to reflect a contractor relationship.
The courts may also look at the level of integration of the business between the contractor and the organisation they are contracted to. In Hollis v Vabu, the court determined that bicycle couriers were so integrated into the business operations that they were effectively employees. That is, the couriers were dependent on the systems and operations of the employer to do their job; they could not operate independently without those systems.
Another factor is often referred to as the ‘results test’ and whether a contractor is employed to achieve a specific ‘result’ rather than for the time they work. Traditionally, contractors were paid for attaining a result rather than turning up and putting in hours. However, the courts will look through such a results test if they do not believe it is a true reflection of the employment relationship. In Hollis v Vabu, the court found the couriers were employees regardless of the fact they were paid on a per delivery basis. Furthermore, given the prevalence of part-time and casual employees who also often work to a result, this test is less heavily relied on than it was in the past.
Questions of independence and risk
A further factor to consider is whether the contractor must perform the work personally or whether they can delegate the work. Having to do the work themselves would tend towards being an employee, whereas having the power to delegate would suggest a contractor.
This is particularly linked to the previous ‘results test’, in that, if the contractor is engaged to achieve a result and can delegate work to another to achieve that result, or part of that result, this would give a stronger indication that a contractual relationship exists.
The question of who bears the risk and responsibility for injury or defect may be another factor in determining if a person is a contractor or an employee. An employee generally does not bear responsibility for personal mistakes or failures to attain the result. On the other hand, a contractor will generally bear the financial risk for injury or poor work. So, if the terms of employment place the risk in the hands of the contractor, they are more likely to be regarded as an independent contractor and not an employee for SG purposes.
Tools and equipment not enough
Traditionally, it has been held that where a person provided their own equipment, tools and other assets they will be considered a contractor. However, in Hollis v Vabu and other cases, the courts have been prepared to look past this to say that a person is an employee. The courts will look at things such as what is the norm for that industry, whether there is compensation for the provision of tools and other factors.
Therefore, the mere requirement that an employee provide their own tools will not be demonstrative of a contractor arrangement. It is just one of a number of factors that must be considered.
What is clear from the SGR 2005/1 ruling, as well as from court decisions, is that the determination of whether a person is an independent contractor or an employee is not a simple matter. The determination is based on a number of factors and the employee and employer/contractor relationship as a whole.
Some recent court cases
Roy Morgan Research
It has generally been held that where a contractor is a company or trust, there is no employee/employer relationship. However, the recent case of Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52 has changed this understanding.
When the Administrative Appeals Tribunal (the Tribunal) reviewed the case, it looked at the totality of the employment situation. The Tribunal gave little weight to the fact that the interviewers engaged by the company used an interposing entity, and the Full Court of the Federal Court agreed with this position, saying it considered “the ability of an interviewer to incorporate as a factor entitled to little weight because the entity selected to do the work (conduct interviews) was the individual interviewer, and the company featured only as the recipient of the fees that would otherwise have been paid to the interviewer. No error has been shown in the Tribunal’s treatment of this factor.”
The Court was of the view that a true independent contractor would be “autonomous rather than subservient in its decision-making; financially self-reliant rather than economically dependent upon the business of another; and … chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.”
What this case demonstrates is that the courts will, as always, be prepared to look beyond any attempt to construct a means to get around the general rules. In that case, it was clear the interviewers were employees. The mere fact that an interposed entity was used was not sufficient in itself to remove the fundamental character of the relationship.
Therefore, if a relationship is in reality an employee/employer relationship and not a true contractual relationship, the use of a trust or company as an interposed entity will not suffice to change the relationship. Nevertheless, an interposed relationship will still be one of the factors in the totality of the relationship that will be considered.
On Call Interpreters
A second case of interest is that of On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366. On Call Interpreters is a business that provides interpreter services, matching an interpreter to a client’s needs. The ATO initially classified the workers as contractors. This classification was made in 1989 after a request for a ruling from the company. However, the ATO later determined the individuals were employees for SG purposes and levied SG charges. This interpretation was challenged.
Justice Bromberg reviewed the particulars of the situation and the law as it stood and then adopted what he called an ‘entrepreneur test’, which effectively required a determination in response to the questions:
- Is the person acting as an entrepreneur running their own business?
- In performing their work, are they working for that business (their own business) rather than in the business of providing work?
Looking at the particulars in this case, the interpreters generally did not use business names (though they had their own ABNs), advertise their services, hold their own insurance or poach each other’s clients.
Both parties referred to the results test, with On Call saying employees were paid per service call and the ATO saying they were paid per hour. Justice Bromberg observed in relation to the results test: “Great care needs to be taken with the application of this indicator … there are many examples of employees being paid on a ‘piece rate’ … and of independent contractors (for instance, solicitors) charging on a time basis.”
On Call also tried to rely on the fact that employees could pick and choose whether to
take on a client. However, Justice Bromberg stated that this could also be an indication of casual employees, therefore it was not determinative.
Justice Bromberg held that the taxpayer failed to discharge their burden of proof that the interpreters were engaged as independent contractors and were not employees under subsection 12(1) of the SGAA. Justice Bromberg also held that, if the interpreters and contractors were not employees under subsection 12(1), they would be employees under the extended definition in subsection 12(3) of the SGAA.
In summary
Recent court cases have further expanded on situations where the courts will consider someone an employee for SG purposes. The full effect of the ‘entrepreneur test’ in On Call has yet to be determined. What is clear, however, is that companies using contractual arrangements and not paying superannuation need to review their arrangements in light of these new interpretations.
Some may need to reclassify contractors as employees or strengthen the basis on which they claim a contractual relationship. The cost of getting it wrong is likely to be high, and we recommend a review of all such relationships.
