Commission contractor vs employee

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Commission contractor vs employee - ATO  makes the correct decision

commission contractor vs employee

The ATO accepts that a commission only salesperson is NOT an employee. Instead, they are independent contractors. But you need evidence of this. In the Commission contractor vs employee debate, it comes down to what is in your Independent Contractors Agreement.

The ATO accepts that a worker selling and installing products on a commission-only basis is not an employee. Instead, he is an independent contractor for superannuation guarantee purposes. Therefore, there is no 9.5% super on the commission only salesperson who is not an employee

If a commission only salesperson is not an employee, what about an insurance agent on full commission?

See a full Sample of our Independent Contractors Agreement here

Commission contractor vs employee

ATO private binding ruling No 1013103814672 (see below) involves a worker selling and installing products for his principal. The worker is paid only on commission. Every dollar the product is sold for above a certain price goes to the worker. This is the commission. If the worker sells a product at a low price he gets no payment.

How to prove you are an independent contractor?

1. own his own business with an ABN
2. best business structures:

a) Company as trustee of a Family Trust or Unit Trust
b) Human as trustee of a Family Trust
c) Company
d) Partnership
e) Sole proprietor (not the best)

3. to work unsupervised
4. to set his own hours of work
5. Independent Contractors Agreement, preferably prepared by a law firm

Best practice to be an independent contractor

1. no training from the principal or the worker pays for the training at commercial rates
2. the principal does not schedule tasks or requires the worker to attend meetings
3. the principal's insurance covers the product sold by the worker. The worker is responsible for other insurances

Legal Consolidated's Independent Contractors Agreement complies with the:

1. worker engaging the services of other people to sell the principal's products
2. worker advertising his or his principal's business, but is not required to do so
3. principal providing the worker with t-shirts, branded clothing and business cards with a company logo
4. principal reimbursing the worker for interstate travel expenses

ATO looks at the 6 common law factors

If you comply with the above, the ATO is likely to find that you are not an employee under s 12(1) Superannuation Guarantee (Administration) Act 1992 (SGAA). In the Private Ruling, the ATO stated that the worker had complied with 6 out of the 7 common law factors.

Our Independent Contractors Agreement support the 7 common law factors supporting an independent contractor relationship:

1. Terms of engagement - contractual agreement
2. Control test - Principal is his own boss as to how he performs the work
3. Integration test
4. Results test
5. Delegation - Principal can use other people
6. Risk - if the Principal fails to perform he gets no money
7. Capital - cost of tools and office born by the Principal

See how Legal Consolidated's Independent Contractors Agreement complies with the 7 tests

But in this Private Ruling the worker failed the Capital test?

In this Private Ruling the ATO noted that the worker failed the 7th test - Capital. This is providing tools and equipment and payment of business expenses. The ATO stated that this capital test in isolation was 'inconclusive'. The ATO noted that the worker paid for the establishment of a home office. This included all relevant office equipment. However, the principal paid for the mobile, t-shirts, business cards, printer paper and ink.  The principal also paid interstate travel expenses.

Overall, the ATO  decided that the worker was not an employee under s 12(1) SGAA. Instead he was instead an independent contractor.

No contract for labour: s 12(3) SGAA

In addition, the ATO found that the worker was not an 'employee' under section 12(3) SGAA. It was not a relationship that was 'wholly or principally' for the worker's labour under s 12(3). The worker is paid primarily for his own labour and skills. However, the ATO stated that the two other requirements of s 12(3) were not present. This was because the worker had the right to delegate work and was paid for a result.

Insurance salespersons

The ATO's new approach gives greater scope for agents to be truly considered independant contractors. Start building our Indepdnant Contractors Agreement to see if you comply.

For more help telephone us.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
Mobile: 0477 796 959
National: 1800 141 612
Email: brett@legalconsolidated.com

 


ATO private binding ruling No 1013103814672

(Authorisation Number: 1013103814672)

Disclaimer

You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.

Date of advice: 3 November 2016

Ruling

Subject: Superannuation guarantee - status of the worker

Question 1

Was the Worker, considered a common law employee of the Principal as defined in subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice:

No Refer to 'Reasons for decision'.

Question 2

Was the Worker an employee of the Principal by virtue of subsection 12(3) of the SGAA?

Advice:

No Refer to 'Reasons for decision'

The arrangement commenced on:

After 1 July 2013

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. Content from the information provided was extracted, summarised and considered under each of the common law elements and a consideration of the extended definition under section 12(3) of the SGAA.

If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

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.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 section 12.

See a full Sample of Legal Consolidated's Independent Contractors Agreement here

Reasons for decision

The SGAA states that an employer must provide the required minimum level of superannuation support for its employees (unless the employees are exempt employees) or pay the 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? (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.

Question 1

Was the Worker, considered a common law employee of the Principal as defined in subsection 12(1) of the SGAA?

Summary

The Worker was not a common law employee of the Principal as defined in subsection 12(1) of the SGAA.

Detailed reasoning

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.

1. 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

Best business structures to prove you are an Independent Contractor:

a) Company as trustee of a Family Trust or Unit Trust
b) Human as trustee of a Family Trust
c) Company
d) Partnership

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.

2. 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.

See a full Sample of Legal Consolidated's Independent Contractors Agreement here

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.

Best business structures to prove you are an Independent Contractor:

a) Company as trustee of a Family Trust or Unit Trust
b) Human as trustee of a Family Trust
c) Company
d) Partnership

3. 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).

See a full Sample of Legal Consolidated's Independent Contractors Agreement here

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.

4. 'Results' test

See how Legal Consolidated's Independent Contractors Agreement complies with the 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.

5. 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.

6. Risk

See how Legal Consolidated's Independent Contractors Agreement complies with the Risk test

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 worker is engaged as an independent contractor.

Application of the common law to your case:

In relation to work performed by the Worker, the Worker was responsible for paying insurance such as worker's compensation, private accident insurance and public liability insurance,

The Principal's insurance only covered the product the worker sells and the installation.

In relation to this, neither the Worker nor the Principal made a claim against any of these policies.

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 for. If the Worker couldn't achieve that amount, then there was no sale. The Worker was therefore in charge of theirs own profits or loss for the product sold.

The Worker paid for the establishment of a home office, including all relevant office equipment. However, the Principal provided office consumables to the Worker and paid for the Worker's business mobile phone usage costs. They also paid or reimbursed interstate travel expenses such as flights, car hire accommodation and meal costs.

Overall, we are satisfied that the risk 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.

7. Capital - Provision of tools and equipment and payment of business expenses.

A worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for his or her 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 will seek separate payment for such expenses from the principal.

In Stevens v. Brodribb at 36-37, the High Court observed that working on one's own account (as an independent contractor) often involves:

The provision of him by his own place of work or of his equipment, the creation of him of goodwill or saleable assets in the course of his work, the payment by him from his remuneration of business expenses of any significant proportion…

Application of the common law to your case:

The Worker paid for the establishment of a home office, including all relevant office equipment. However, the Principal provided office consumables to the Worker and paid for the Worker's business mobile phone usage costs.

The majority of the work the Worker undertook was interstate. The Worker's expertise was required in another state. The Worker did not pay their own interstate travel expenses. The Principal paid or reimbursed interstate travel expenses such as flights, car hire accommodation and meal costs.

The Principal paid the Worker for consumables used by the Worker that being a t-shirt, a business card both with the Principal's business logo and printer paper and ink.

The Worker did not carry out physical work. Their generation of income was not dependent on the use of tools. They required only minor items of office equipment (e.g. phone, desk, and computer) which they purchased. The Worker used a motor vehicle to travel and they owned the vehicle.

The Principal states the following:

● 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.

Overall, we find that the capital test in isolation is inconclusive of the notion that the relationship between you and the workers was one of principal and independent contractor.

Our conclusion regarding the common law definition of employee

We have considered the relationship between the Principal and the Worker under seven common law factors. On six of the factors we found that the tests were more in favour of the notion that the relationship between the Principal and the Worker was one of principal and independent contractor.

Consequently we consider on balance that the results under section 12(1) of the SGAA are that the relationship is one of principal and independent contractor.

We are also required to consider the expanded definition of employee under subsection 12(3) of the SGAA.

Question 2

Was the Worker an employee of the Principal by virtue of subsection 12(3) of the SGAA?

Summary

The Worker was not an employee of the Principal by virtue of subsection 12(3) of the SGAA.

Detailed reasoning

Expanded definition of employee for SGAA purposes

The expanded definition of an 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.

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. commission contractor vs employee commission contractor vs employee commission contractor vs employee

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.

The Worker was paid commission on an amount above the base rate set for each product sold. If the amount above the base rate was not achieved the result was the Worker received nothing.

Based on the available facts and evidence, we consider that the Worker was 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 (common law element of delegation) indicate that the Worker did have the right to delegate work to others.

Not paid to achieve a result

As discussed earlier, we consider that the facts and evidence (common law element of results) indicate that the Worker was paid for a result.

Our conclusion regarding the expanded definition of employee

Accordingly, as the Worker did not satisfy all three components of the expanded definition under subsection 12(3) of the SGAA, he did not meet the expanded definition of employee as set out under subsection 12(3) of the SGAA.

Conclusion - overall

Upon taking into account of all the available facts and evidence, the Commissioner considers that with respect to work performed for the Principal, the Worker did not meet the definition of an employee for the purposes of the SGAA under either common law or the expanded definition provided under subsection 12(3) of the SGAA.

Accordingly as the Worker is not an employee of the Principal, ordinary time earnings usually the amount an employee earns for their ordinary hours of work which includes commissions, did not apply to the Worker. As the Principal did not have an obligation to pay superannuation contributions for the benefit of the Worker under the SGAA, the Principal also did not have an obligation to pay superannuation contributions on the commission paid to the Worker.

Best business structures to prove you are an Independent Contractor:

a) Company as trustee of a Family Trust or Unit Trust
b) Human as trustee of a Family Trust
c) Company
d) Partnership


For more help telephone us.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
Mobile: 0477 796 959
National: 1800 141 612
Email: brett@legalconsolidated.com

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