Contractor or employee? Contractor or employee. Definition of employee. Employee at common law. CONTRACTOR vs EMPLOYEE. Substance of the relationship

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1 Copyright notice The Taxation Institute of Australia website and all the content downloaded (except Third Party Products*) from the Taxation Institute of Australia website remains the property of the Taxation Institute of Australia and shall not be reproduced, distributed, displayed or disclosed without the written permission of the Taxation Institute of Australia. *Copyright of the Third Party product applies Disclaimer notice CONTRACTOR vs EMPLOYEE The material published in this paper is published on the basis that the opinions expressed are not to be registered as the official opinions of the Taxation Institute of Australia. The material should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests. Grantley Stevens FTIA Partner, Edwards Marshall or employee? or employee Definition of employee common law Cases Key factors Payroll tax Superannuation WorkCover Penalties Examples Substance of the relationship Written contract exist Employer responsibilities Awards GST Payroll tax PAYG Superannuation WorkCover Definition of employee at common law t defined in the ITAA or TAA Need to look at ordinary meaning common law Different definitions in different jurisdictions Old master/servant relationship Contract OF service v Contract FOR service Different facts different decisions totality of the relationship Determine the nature of the contract

2 World Book (Australia) Pty Ltd v FCT World Book case cont Company sold encyclopaedias Engaged people on a commission basis Worked to achieve a given result if sold books received commission Was the commission earned wholly or principally for labour? Sales person had signed written Independent Agent s agreement right of delegation, he could employee others free to choose areas, hours worked, selling methods incurred incidental costs such as phone, travel, postage paid for the sample encyclopaedia Worldbook had no right to direct or control Held contract was not wholly or principally for labour World Book Vabu P/L v FCT 1996 Sheller JA Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contract Couriers provided own capital & maintained it vehicle, motorbike or bicycles Co. provided radio equipment & uniform Couriers received set fee per delivery based on distance Work prescribed hours & observe a starting time Deliveries allocated by the company Vabu P/L v FCT 1996 Court acknowledged degree of control Couriers held not to be employees for SGC purposes Providing own vehicle significant factor This decision should be treated with caution Hollis v Vabu 2001 HC case Liability for personal injury Majority 5-2 decided bicycle courier was an employee Significant control was exercised Bicycle couriers were not running own enterprise Have regard to totality of relationship

3 Roy Morgan Research Centre P/L v Comm for State Taxation Payroll tax case Market research interviewers Whether employees or independent contractors RMRC paid superannuation & WorkCover RMRC case cont Interviewers conduct face to face interviews Weekend work paid by assignment Provide own vehicle Detailed instructions/complete questionaires Court considered the engagement and training of interviewers nature of work performed by interviewers RMRC case cont RMRC case cont Engagement & Training of Interviewers ask questions exactly same manner protocols existed about completion of questionnaires interviewer had to gain permission to conduct interviews no special clothing provided with ID badge and RMRC bag Nature of Work Performed unsupervised did not complete assignment no remuneration t given any assurances RMRC did random audit surveys Required to provide ABN RMRC case - Judgement - control Totality of relationship important Control less emphasis practical ability to control actual performance obligations by interviewer significant remuneration unless task completed HELD - CONTRACTOR Employer directs & controls manner of performance right to how it is to be done Authority of command Working in the business of the employer Who has ultimate authority Hollis v Vabu little control manner performing work Working for own business

4 Control test organisation test Stevens v Brodribb Does the individual have control (or the capacity to exercise) Control test less important Hollis v Vabu Nature of work has changed so control is much less important factor Serves the employer s business Employer has right to particular person Employer dictates the place of work & hours Get reimbursed for business expenses Conducting own business, create goodwill Different clients, advertise, premises Independence in the conduct of their operations High level of discretion & flexibility Incur business expenses results & risk - delegation Hourly rate Commission Little or no risk Produce a given result - achievement Free to employ own means other labour, use own P & E negotiated contract price Commission Bears the commercial risk, may have insurances Employer exclusive services of employee Personally perform Organizes/manages but not responsible for paying replacement Works for others (or ability to work for others) Right to delegate Commercial risk other factors Pay-roll Tax Act 1971 Company uniform entitlements Job vacancy advertising Termination ABN? benefits, no obligation to work Contract by tender Review written agreements? What is the intention of the parties Wages defined sec 3 Extended definition amts paid under any prescribed classes of contracts attributable to labour Service contracts Catch many labour contractor payments (incl thru other entities) Eg engineers, IT consultants, builders consistently working for one principal Employment agencies the agency is responsible for pay-roll tax

5 Service contracts - exclusions Pay-roll tax other exclusions Services ancillary supply or use of goods Where two or more persons perform the work Services provided less than 90 days in a year Services normally required for less than 180 days Services provided to public generally Owner drivers Insurance sales agents Door to door sales agents Builders can be caught Comm generally excludes % for materials & equipment Excluded if indep business, not providing labour only services, quotes on all inclusive basis, bears commercial risk, provides vehicle Grouping Provisions Superannuation Grouping rules Grouping where employees used in another business Sec 18C very broad Include contractors Apply to be excluded under sec 18I s defn sec 12 SGAA Expanded wholly or principally for the labour SG paid to contractors deductible? Can be an employee if have ABN Labour hire firm Superannuation Brinkley v FCT 2002 Payments to companies, trusts or partnerships are excluded providing the arrangement is not a sham Partnership under 72 (1) is deemed to be a separate legal entity Artists, musicians & sportspersons Providing labour services liable for SG If selling property paintings, CD s, books, scripts no SG Fishing boat were crew members employees for SGAA purposes Captain received 20% of catch, made decision, did not bear losses Deckhands received 10% fish no pay Held employees at common law, sec 12 (3) put issue beyond doubt, Brinkley has to pay SG

6 WorkCover WorkCover - industries WRC Act exists to protect workers Worker means a person by whom work is done under a contract of service Self employed, partners not covered If paying levy for contractor & held not worker not covered Principal can be deemed employer Industries specifically included: Building work Cleaning work Driving taxi cab Driving or riding a vehicle Performing as an entertainer Performing work as an outworker Building Work Who is covered? WorkCover Does the contractor operate through a proprietary limited company? Is the work performed for the purposes of the principal s trade or business? Does the contractor personally perform at least part of the work? The principal has no responsibility to cover the contractor but should ensure that if employing workers, the contractor is registered with WorkCover Corporation. The principal has no responsibility to cover the contractor. The principal has no responsibility to cover the contractor. Entertainers if performing as singer, dancer, comedian at hotel, reception house or similar venue deemed to be worker mas shows, end of year cocktail shows, TIA conventions - caught Does the contractor employ workers including a person who is deemed worker under these guidelines, to carry out any part of the contract? Does the value of materials supplied by the contractor exceed four per cent (4%) of the full contract value or $50, whichever is greater? Does the replacement value of any one tool or any single item of plant or equipment, owned or leased by the worker for work purposes (whether or not it is used in the performance of the particular work) exceed, in 1999, $11,800? The contractor is self employed, is an employer in their own right and must be registered as an employer. The contractor is self employed and not a worker of the principal (refer to the contract of/for service test). The contractor is self employed and not a worker of the principal (refer to the contract of/for service test). Fishing crew members Person remunerated by share of catch excluded for Workcover purposes cf with Brinkley had to pay SG If paid mix of wage & fix rate/tonne generally worker The principal is deemed to be the employer and is responsible to cover the contractor by registering with WorkCover and paying a levy. PSI Rules Penalties Interposed entities still used for many reasons Apply to contractors 3 main effects PSI treated as income of individual entity pay individual the PSI as wages & withhold tax individual not able to claim certain deductions PSI rules do not alter legal relationship between individual and payer Employers take all the risk!!! Pay-roll tax Interest - base rate + premium (8%) Penalty tax up to 75% if deliberate non payment Generally 25% if voluntary compliance Comm can remit both interest & penalty

7 Superannuation Penalties SG penalties Employers have to pay SG obligations quarterly If not = charge (non deductible) SG shortfall minal interest component 10%pa Admin component $0/fin year, $20/employee GIC calc any unpaid SG charge Employers self assess if shortfall lodge statement Late lodgement penalty up to 200% of SG charge, ATO generally impose a flat 10% penalty Penalties can also apply for failure to maintain proper records prosecution, false or misleading statements, entering into scheme to avoid SG Employer should have offered super choice penalty 25% any contributions up to max $500/employee/quarter non deductible WorkCover penalties PAYG penalties Up to 300% of levy due Late payment interest prime bank rate If do not pay within specified time - $10,000 penalty Withhold 48.5% if no TFN GIC Corporation or individual - fine is $1,100 Administration Penalty = amount should withheld Comm power to remit Corp has power to remit interest or penalty Example table Example table Type of payment Full time employee, aged 50, PAYG Payroll tax $1,000 gross per week n executive director paid $1,000 per quarter dir inc EM pays Dirty Darryl to clean our offices. Pay $500 per week EM pay Dirty Cleaners Partnership EM pay Dirty Cleaners P/L Darryl sole employee EM pays Plastic Hole Pipes for materials for irrigation of EM vineyard SGC Work Cover not worker ensure they are reg Type of payment PAYG Payroll tax EM Vineyards pay $10,000 to Water Irrigators to install irrigation (one worker) <90d EM Vineyards pay $10,000 to Water Irrigators to install irrigation (two workers) EM Vineyards pay $10,000 to Water Irrigators P/L to install irrigation as above EM pays $10,000 to Mark Williams, guest speaker at <90d our Partner Conference >$450 <90d SGC Work Cover