December 2013 Newsletter 

In this edition:

Welcome

Christmas greetings and holiday trading hours

Paid Parental Leave Scheme and employer obligations

Identifying the difference between contractors and employees

Who are you leaving your super to when you die? - Reversionary versus non-reversionary pensions

As an employer, your tax, superannuation and other government obligations will vary depending on whether you have employed an employee or a contractor.

Generally, for employees you will be required to withhold PAYG from their salary, pay superannuation on their Ordinary Times Earnings (OTE) and will likely be required to pay Workers Compensation in respect of their employment. Their remuneration may also be included for payroll tax purposes.

However, contractors generally look after their own tax, superannuation and workers compensations obligations (although you may have to pay super for some contractors employed wholly or principally for their labour).

These issues have been brought into clarity by a recent decision from the Administrative Appeals Tribunal (the AAT), in which it has affirmed the Commissioner's decision to impose on a taxpayer (a trustee of a family trust) superannuation guarantee default assessments after finding that the taxpayer's workers were employees and not independent contractors.

Background
The trust carried on a commercial residential plumbing business and during the relevant period had approximately 13 employee plumbers and four to five independent contractor plumbers. Following an employer obligations audit, the Commissioner determined that the taxpayer had not met its superannuation guarantee obligations for five independent contractor plumbers ("the Workers").

The Commissioner determined that the Workers were not contractors but were employees. Superannuation guarantee default assessments were issued to the taxpayer in respect of the Workers for the quarters from 1 July 2009 to 30 June 2011.

Decision
After considering the "totality of the relationship" and the evidence before it, the AAT concluded that the Workers were employees and not independent contractors. In doing so, it accepted the Commissioner's submission that effectively, some Workers were full-time casuals, were paid an hourly rate and, accordingly, were not eligible for holiday or sick leave.

In making its decision, the AAT considered the following arguments that had been made by the taxpayer:

Contractual documentation – the AAT noted that the Workers each had the same contract with the same terms. Although the Workers were different contractors, they were largely treated the same under their contracts with the taxpayer. The AAT said this type of arrangement "is expected for employees, but is extraordinary for independent contractors and one would expect that at least some of their terms and conditions would be different".

Workers provided own vehicle and own tools and equipment – the Workers would use their own vehicles, but the AAT noted that where larger work was required they would use the taxpayer's vehicles. The Workers would also use their own tools and equipment, but again, the AAT noted that the Workers would use the taxpayer's tools and equipment where specialised work was required. Further, it noted that plumbing supplies were purchased by the Workers using credit cards provided by the taxpayer.

Taxpayer had limited control over work – although accepting that the taxpayer's control of the work done was limited, the AAT said this was "not surprising, given that each of the Workers was a qualified and experienced plumber". In considering the various indicia of control, the AAT noted that the right to delegate was only with the consent of the taxpayer (and "was in any event illusory") and none of the Workers delegated or subcontracted.

Workers had right to refuse work – the taxpayer had contended that the Workers could refuse work; however, the AAT said, generally, the Workers did not refuse work allocated to them by the taxpayer. Further, the AAT noted that the Workers did not rectify any of their defective work at their own cost.

Workers not paid for leave and paid a higher hourly rate – the hourly rate charged by the Workers to customers was largely set by the taxpayer. The rate was less than other plumbing contractors but greater than a regular employee rate. The AAT noted that although the hourly rate occasionally took into account the use of the Workers' own vehicles and some tools and equipment, the Workers were not separately paid for travel time nor for leave. However, it noted that casual employees would also not be paid for leave, but would be paid a higher rate than permanent employees.

The AAT noted that a number of Workers worked 40 hours per week and some worked at least 25 hours per week. It said such hours, on a regular basis, were in keeping with employees, not independent contractors. In relation to time off, the AAT noted that permission was sought from the taxpayer, "at least by some of the Workers". It also noted that a supervisor of the taxpayer monitored the attendance of Workers, but only to see that the work was being done.

Workers had ABNs and were not required to wear clothing with company logo – each of the Workers had ABNs. However, the AAT noted that they did not quote for jobs, and "they simply did the jobs at an hourly rate for their labour". Further, it noted that although the Workers had set up their own businesses, they did little work for others and worked almost exclusively for the taxpayer. They did not invoice on their own business letterheads, and invoicing and payment of the invoices was not results-based.



The AAT also noted that the Workers wore clothing with the company logo on them (although the taxpayer contended that there was no requirement to wear the clothing and that the Workers wore uniforms to identify themselves when government contracts were involved). The AAT said that in doing so, the Workers presented themselves as part of the taxpayer's business.

The AAT concluded that the Workers did not present themselves as independent contractors pursuing their own businesses independently from the taxpayer's business. The AAT was of the view that the Workers were employees within the meaning and tests of common law. It found that the Workers were paid principally for their labour and therefore they came within the expanded definition of "employee" in the superannuation legislation. Accordingly, they were entitled to super guarantee payments.

The above case underlines that it is important for all employers to carefully consider their relationship with contractors and, when it doubt, to contact their Goodwin Chivas & Co advisor with any queries.