Payroll ‘ PBR on who is an employee for Super Guarantee Purpose

This article looks at a private binding ruling (Authorisation Number: 1013103814672 – ‘the PBR’) that considers whether a person was an employee for purposes of the superannuation guarantee legislation. It deals with the status of a salesperson who receives only commission payments.

The ruling usefully considers factors (and identifies associated case law) in determining whether the person was a common law employee and demonstrates the process of weighing up such factors to reach a conclusion.

The ruling also considers the statutory extension of the concept of an employee to include a person engaged ‘under a contract that is wholly or principally for the labour of the person’.

The Applicable Legislation

Subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) provides:

‘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):

expand the meaning of those terms; and
make particular provision to avoid doubt as to the status of certain persons.’

Subsection 12(3) extends the concept of ’employee’ for SGAA purposes:

‘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.’

The PBR explained the interaction of these provisions as follows:

‘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? (SGR 2005/1), from a ‘contract for service which is typically a contractor and principal type of relationship and did 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 could 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.’

It will be noted that s. 12 contains several extensions to the common law concept of employee. Subsection (3) is a commonly encountered extension. The facts being considered did not raise the other more narrow extensions.

Facts considered by PBR

The PBR summarised the circumstances which it addressed, as follows:

‘A request for a private ruling was lodged on behalf of the Principal in respect of whether a superannuation guarantee liability arises for the Worker.

The Principal sells and installs a product.
The Principal entered into a verbal agreement with the Worker for the Worker to negotiate the sale of its product.
The Worker was engaged through word of mouth on a friend’s recommendation.
Under the terms of the agreement the Worker would be entitled to a commission payment from the Principal, over a base price for the sale of the product.
The Worker provided an invoice with an ABN for their commission. The commission varied from sale to sale.
The Worker is an individual sole trader and has an ABN.
The Worker was not an apprentice, trainee, trades assistant of a labourer.
The Worker could engage the services of other parties as they could carry on any other form of business and/or employment of their choosing.
The Worker was not obligated to sell the product for the Principal as they could carry on any other form of business and/or employment of their choosing.
The amount of commission paid to the Worker was based on the sale price they negotiated in excess of the base price; the commission varied with each sale.
If the Worker did not sell the product, they received nil payments from the Principal.
It is noted, that if the Principal was not paid for a sale negotiated by the Worker, the Worker did not get paid commission.
The Worker did not require specific equipment, tools or plant outside of general office equipment.
The Worker required only minor items of office equipment (e.g. phone, desk, computer), which they purchased.
They owned a motor vehicle that was used to travel to customers in the Workers home state.
The Worker did not carry out physical work; fixing problems, defects or damage.
The Worker under the agreement was paid by the Principal for interstate travel costs incurred by the Worker when visiting customers, including hire car, accommodation and flights.
The Principal provided office consumables to the Worker and paid for the Worker’s business mobile phone usage costs.
The Principal has other workers that are engaged on the same or similar basis.
The Worker provided services to at least one other business, whilst under the arrangement with the Principal.
The Worker received no training.
The Worker determined the hours of work and the Principal had no say.
The Worker was not required to attend business meetings or meetings with clients.
The Principal did not schedule tasks for the Worker and the Worker was not supervised.
The Worker did what it took to sell the product. This could be a phone call or several visits to the customer.
The Principal did not schedule tasks for the Worker and they were not supervised.
The Worker did not advertise their own business or the Principal’s business, on any of the assets/equipment/tools used by the Worker.
The Principal provided a t-shirt with the company logo to the Worker to wear when visiting clients. The Worker also had a business card with the Principal’s logo.
The Worker did not submit quotes, as the product was made available to the Worker at a minimum price. Whatever the Worker sold the product for over that minimum price, was the amount they invoiced the Principal. If they couldn’t achieve that amount, then there was no sale. Copies of the invoices for several months have been provided.
As the majority of the Worker’s travel for work was interstate, the Worker did not pay their own interstate travel expenses. The Worker lived in one state and their expertise was required in another state; They received payment and reimbursements for flights, car hire accommodation and meal costs when required to travel interstate and phone bill for work calls. The Principal also paid for the printer paper and ink.
In relation to work performed by the Worker, the company insurances only covered the product the Worker sold and the installation. The Worker was responsible for other insurances such as compensation, private accident insurance, public liability insurance, etc.
The Principal stated the following in respect of vehicle use by the Worker:
- Whether the vehicle is actually needed to perform the Worker’s tasks or is simply a convenience is open to interpretation.
- The Worker may choose to use a motor vehicle to travel without it being necessary.
- The Worker certainly did not require a motor vehicle to carry equipment or tools of trade.
The Worker was providing services to at least one other business at the same time they were selling the Principal’s product under their arrangement with the Principal.
The Worker has established their own business. The Worker was operating this business at the same time they were providing services to the Principal up until the time they ceased their relationship with the Principal. This business provides services directly in competition with the Principal. They also use the same suppliers as the Principal.’

Whether the Worker is a common law employee

The Commissioner analysed (and weighed up) seven factors. The Commissioner concluded that the Worker was not a common law employee:

‘The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the independent contractor relationship that is referred to as a contract for services. 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.

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. For this test, we must 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.

It might be argued that the parties’ intention in forming a contract is not subjective, but an objective one; that is, the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Isaacs J in Curtis v. The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17:

Where parties enter into a bargain with one another whereby certain rights and obligations are created, they could not 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.

Therefore, simply defining someone as a contractor did not necessarily lead to the conclusion that the individual is providing services as part of an operation of their own independent business. In Hollis v. Vabu Pty Ltd (2001) 207 CLR 21 (Hollis v. Vabu Pty Ltd) it was noted that although no payments of annual leave or sick leave were given, and no superannuation deductions were made by Vabu in respect of the bicycle couriers, the relationship between the parties was found not merely from these contractual terms. The system which was operated under and the work practices imposed by Vabu went to establishing ‘the totality of the relationship’ between the parties and it is this which is to be considered

Application of the common law to your case:

The Principal entered into an agreement (verbal) with the Worker. Under the terms of the agreement the Worker was empowered by the Principal to negotiate the sale of a product on its behalf. For each product on which the Worker negotiated a sale, they would be entitled to a commission payment from the Principal.

To calculate the commission the Principal provided the Worker with a base price at which the product had to be sold. The amount of commission paid to the Worker is then based on the sale price they negotiated in excess of the base price; the commission varied with each sale. If the Worker did not sell any of the products they received nil payments from the Principal. Also if the Principal was not paid for a sale negotiated by the Worker, the Worker did not get paid commission.

The Worker would provide an invoice with an ABN for their commission. Copies of invoices provided over a certain period showed the Worker’s home address, their ABN and the total unit price over the base price, which were varying amounts.

The Principal advised that the Worker was engaged by word of mouth, on recommendation from a friend who said the Worker had experience in that field of work. The Principal has other workers engaged on the same basis.

The Worker was not an apprentice, a trainee, trades assistant or a labourer. The Worker is an individual operating as a sole trader and has an ABN. The Worker could engage the services of other parties to sell the product on behalf of the Principal.

The Worker was not obligated to sell the product for the Principal. The Worker could carry on any other form of business and/or employment of their choosing. Information provided in an email advised that the Worker was providing services to at least one other business at the same time they were selling the product under the arrangement with the Principal.

The Worker set their own hours and was not required to attend meetings. The Principal did not schedule tasks and they were not supervised.

Overall, we are satisfied that the terms of engagement test in isolation is more in favour of the notion that the relationship between the Principal and the Worker is one of principal and independent contractor.

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.

The mere fact that a contract may specify in detail how the contracted services are to be performed did not necessarily imply an employment relationship. A high degree of direction and control is common in contracts for services because the payer has the right to specify in the contract how the services are to be performed. Similarly, the right to supervise how the work is to be performed did not constitute a contract of service where the essence is one of independent contractor.

Paragraphs 36 and 37 of Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? provides that while control is important, it is not the sole indicator of whether or not a relationship is one of employment. The approach of the Courts has been to regard it as one of a number of indicia which must be considered in determination of that question.

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.

Application of the common law to your case:

The following information is relevant to the working relationship with the Worker and the extent to which the Principal had the right to control the manner in which the work was performed:

There was no written contract between the Principal and the Worker and no direction as to the hours of work. The Worker did what it took to sell the product. This could be a phone call or several visits to the customer but that is completely in their hands.
There was also no obligation on the Worker’s part to provide their services to the Principal.
The Worker was not provided with training. There were no scheduled jobs or tasks as the Worker was able to determine their own hours of work and the Principal had no say in setting the hours of work.
The Worker could engage the services of other parties to sell the products on behalf of the Principal.
The Worker could carry on any other form of business and/or employment of their choosing.

Overall, we are satisfied that the control test in isolation is more in favour of the notion that the relationship between the Principal and the Worker was one of principal and independent contractor.

Integration

Another significant factor in establishing the nature of a contractual relationship at common law is to determine whether the worker’s services are an integral part of the employer’s business (under a contract of service as an employee) or providing services as an individual carrying on his or her own business (under a contract for services as an independent contractor). This is known as the ‘integration’ test.

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.

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 worker needs to be running their own business or enterprise and have independence in the conduct of their operations.

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 a 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.

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.

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…

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

It is therefore necessary to consider whether the worker is providing services as part of the principal’s business (under a contract of service as an employee) or providing services as part of their own business (under a contract for services as an independent contractor).

Application of the common law to your case:

Information provided by the Principal stated that the Worker was not required to attend mandatory meetings within the Principal’s business or with the Worker’s customers. The Worker did what it took to sell the product. This could be a phone call or several visits to the customer but that was completely in the Worker’s hands. No jobs/tasks to be carried out by the Worker were scheduled by the Principal. The Worker was not supervised.

The Worker was an individual operating as a sole trader and had used their skills before they worked for the Principal as they had previously worked in the same field.

The Worker could engage the services of other parties to sell the product on behalf of the Principal. The Worker was not obligated to sell the product for the Principal. The Worker could carry on any other form of business and/or employment of their choosing. The Worker was providing services to at least one other business at the same time they were selling the Principal’s product under the arrangement with the Principal

The Worker was also operating their own business for a period of time, at the same time they were providing services to the Principal up until the time they ceased their relationship with the Principal.

The Worker was supplied with a t-shirt and a business card both with logos promoting the Principal’s business. The Principal paid the worker for printer paper and ink.

The Principal did not advertise the business on any of the assets/equipment/tools used by the Worker other than the t-shirt and business card. The Worker did not advertise their business on any of assets/equipment/tools they used.

Overall, we are satisfied that the integration test in isolation is more in favour of the notion that the relationship between the Principal and the Worker was one of principal and independent contractor.

‘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.

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. In World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327 (World Book (Australia) Pty Ltd v. FC of T) Sheller JA said:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor.

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 (Commissioner of State Taxation v. 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. It was found that the workers were paid for their time spent and labour, and not to produce a result.

Having regard to the true essence of the contract, the manner in which payment is structured will not of itself exclude genuine result based contracts. For example, 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, or may even be calculated on that basis, subject to reasonable completion times. 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 nature of the relationship.

Accordingly, the contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties.

Application of the common law to your case:

As mentioned above the Principal provided the Worker with a base price at which the product had to be sold. For each product on which the Worker negotiated a sale they would be entitled to a commission payment from the Principal.

The Worker would generate commission based on the amount by which the sale price to the customer exceeded the base price set by the Principal.

If the Worker did not sell any products they received nil payments from the Principal. The Worker was not paid by the hour and was only paid when they achieved a result that attracts a commission. Also if the Principal was not paid for a sale negotiated by the Worker, the Worker did not get paid commission.

The Worker would provide an invoice with an ABN for their commission. Copies of invoices provided over a three-month period showed the Worker’s home address, their ABN and the total unit price over the base price, which were varying amounts.

Overall, we are satisfied that the results test in isolation is more in favour of the notion that the relationship between you and the workers was one of principal and independent contractor.

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 ant person is contractually required to personally perform the work, this is an indication that the person is an employee.

If the contract did 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 did 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 did not give the respondent [the principal] 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) did 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:

The Principal has stated that the Worker was not obligated to sell the product for the Principal, as they could carry on any other form of business and/or employment of their choosing. The Worker was an individual who operated as a sole trader and had an ABN. The Worker was not an apprentice, trainee, trades assistant or labourer. The Worker could engage the services of other parties to sell the product on behalf of the Principal.

Overall, we are satisfied that the delegation test in isolation is more in favour of the notion that the relationship between you and the workers was one of principal and independent contractors.

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.

Carrying their own insurance and indemnity policies is an indicator that a