Do you utilise the services of contractors in your business? If so, you need to be aware that the definition of an employee for superannuation purposes can differ from the definition of an employee for other purposes.
Recent court cases have expanded on what many thought was the distinction between a contractor and employee under the Superannuation Guarantee (Administration) Act 1992 (SGAA).
The Tax Office has been keen to use the expanded definition to take on employers. Therefore, it is important for you to understand the broad definition to avoid problems with the Tax Office and the potential for fines and other costs.
Firstly, some theory.
Section 12 of the SGAA defines an employee as:
(1) Subject to this section, in this Act, employee and employer have their ordinary meaning. However, for the purpose 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 to certain persons.
(3) If the person works under a contract that is wholly or principally for the labour of the person, the person is an employee to 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.
To assist business in understanding the distinction between an employee and a contractor, the Tax Office issued Superannuation Guarantee Ruling 2005/1 (SGR 2005/1). This sets out the Tax Office’s view on when a contractor falls within the expanded definition of an employee. The ruling sets out three (3) principal tests when a contractor will be considered an employee. These are if they:
- 1.are remunerated wholly or principally for their labour and skills
- 2.perform the work themselves (with no right of delegation)
- 3.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 employee/employer relationship between the individual and the other party for the purposes of the SGAA.
However, the recent case of On Call Interpreters sets limitations on the ability to rely on the use of a trust or company to circumvent what would otherwise be an employee/employer relationship for superannuation guarantee purposes.
Some of the other factors considered in determining whether a person is either an employee or contractor include:
- the terms and conditions of the contract
- 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.
Among the first things to be considered by the courts are the terms and conditions of the employment. This involves more than just the words used in the contract, so merely labelling someone as a contractor doesn’t 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.
Another factor is often referred to as their “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 obtaining 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.
A further fact 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 the result, this would give a stronger indication that a contractual relationship exists.
The question of who bares the risk and responsibility for injury or defect may be another factor in determining whether a person is a contractor or an employee. An employee generally does not bear the responsibility for personal mistakes or failures to obtain a result. On the other hand, a contractor will generally bear the financial risk for injury or poor work.
Traditionally, where a person provided their own equipment, tools and other assets they would be considered a contractor. However, the courts have been prepared to look past this to say the 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 the tools and other factors. Therefore, the mere requirement that an employee provide their own tools will not be demonstrative of a contractor relationship. It is just one of many factors that must be considered.
What is clear from SGR 2005/1 as well as the recent court decisions, is that the determination of whether a person is an independent contractor or 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.
Should you wish to discuss how these rules might apply to your particular situation, please contact Ellingsen Partners.