Determining whether a worker is an employee
Status: Current. This revenue ruling should be read in conjunction with Information Circular No. 5.
Version Number: 1
Legislation: Payroll Tax Act 2009
Date Issued: 2 August 2011
Revenue Rulings do not have the force of law.
Payroll tax is payable on wages paid or payable to an employee. The term ‘employee’ is not defined in the Payroll Tax Act 2009 (the “Act”) and therefore takes its ordinary or common law meaning. The courts have established a number of principles that assist in determining whether a worker is a common law employee.
In most cases, it will be clear whether an employee/employer relationship or a principal/independent contractor relationship exists. However, there may be cases where the true character of the relationship is unclear or ambiguous.
The purpose of this Ruling is to provide information about employment relationships to assist employers, principals and their professional representatives determine whether their workers are common law employees.
This Ruling is not intended to provide definitive advice as to whether a particular relationship is an employer/employee relationship or a principal/independent contractor relationship as the facts of each case vary. Where the nature of the relationship is unclear, tax professionals and practitioners may seek further information from the Commissioner of State Taxation (the “Commissioner”) about the payroll tax implications of specific arrangements.
It should be noted that if a worker is not a common law employee, it does not necessarily mean that payments made to them are not subject to payroll tax. The definition of wages in the Act also includes amounts paid or payable to contractors under the contractor provisions. Therefore, the contractor provisions should also be considered. Specifically, where the contractor provisions apply, the principal is deemed to be the employer, the worker is deemed to be the employee and the payments made to the worker are deemed to be wages unless one of the exemptions applies.
Details about the contractor provisions in each jurisdiction are available through each state or territory’s website.
The examples used in this Ruling have been included to illustrate a particular factor relevant to the determination of whether a worker is an employee or an independent contractor and are based on a limited set of facts. In practice, the totality of the relationship must be considered before determining whether a worker is an employee or an independent contractor. It is also recognised that, in practice, a much broader set of facts than those detailed in the examples will generally be present.
The courts start from a position of determining whether a common law employment relationship exists, as opposed to a principal/independent contractor relationship. In a common law employment relationship there is a ‘contract of service’. A ‘contract of service’ is based on a ‘mutuality of obligation’; that is, the employer makes an offer of work with accompanying remuneration and the employee accepts the terms of the offer by performing the work.
This contract can be either implied or expressed orally or in written form.
Factors that have been considered by the courts in determining whether a worker is an employee include:
- control and direction;
- contract and practical relationship;
- contracts to achieve a ‘given result’;
- independent business;
- power to delegate;
- provision of tools and equipment; and
- other indicators.
In considering these factors, it should be noted that numerous court decisions have held that the totality of the relationship between the parties must be taken into account before deciding whether a worker is an employee or an independent contractor; that is, a determination cannot be made on the basis of a limited, or selective, number of factors (see for example: Stevens v Brodribb Sawmilling Co Pty Ltd  160 CLR 16, Abdalla v Viewdaze  AIRC 504, Commissioner of State Revenue (WA) v Mortgage Force Australia Pty Ltd  WASCA 24, Commissioner of State Taxation (SA) v Roy Morgan Research Centre Pty Ltd  SASC 288, Sweeney v Boylan Nominees Pty Ltd  HCA19) and B & L Linings Pty Ltd & anor v Chief Commissioner of State Revenue (No 2)  NSWADTAP 32).
Control and Direction
An important factor in determining the nature of the relationship between a business operator and a worker is the degree of control that the business operator can exercise over the worker.
The right of a business operator to control or to direct how, where, when and who is to perform the work in question is a strong indicator that a worker is an employee (see for example: D & D Tolhurst Pty Ltd v Commissioner of State Revenue (Vic) 97 ATC 2179; Hollis v Vabu Pty Ltd (T/A Crisis Couriers) (2001) 207 CLR 21; JA & BM Bowden & Sons Pty Ltd v Chief Commissioner of State Revenue (2000) ATC 4596; Narich Pty Ltd v Commissioner of Pay-roll Tax (NSW) 84 ATC 4035 and Commissioner of Pay-roll Tax (Vic) v Mary Kay Cosmetics Pty Ltd 82 ATC 4444)).
The importance of control lies not only in its existence, but also in the right of the business operator to exercise it. In some businesses, the business operator does not actually exercise much control or direction over a worker. In this context, the issue to be considered is whether the business operator has the right or authority to exercise control or direction over the worker, not whether such control is actually exercised.
In considering whether the business operator has the right or authority to exercise control over how the worker performs the work, it is important to recognise that in certain circumstances there may be very limited scope or need to exercise control. Additionally, as discussed in Tolhurst, the element of ’control’ must be assessed in light of the nature of the actual work that is being performed by the worker.
For instance, where a worker is a highly skilled tradesperson, there may be little need for the business operator to supervise or direct the manner in which the worker goes about providing services, even though they could do so. Where the business operator does not have the qualifications or experience of the worker, the business operator will have little scope or need to exercise control over how the worker routinely goes about their tasks.
However, where the business operator does not exercise direct control, there may be scope to exercise control in relation to incidental or collateral matters and this will be sufficient to satisfy the element of control. Such control of incidental or collateral matters may indicate that the business operator exercises their right to control not by instructing the worker on how to perform work, but by directing the worker as to which jobs to perform at a given time or by checking on the standard of the work carried out.
The absence of control may indicate that an employer/employee relationship does not exist; however, this is not necessarily conclusive. In several court cases including Brodribb, Tolhurst, Vabu Pty Ltd v Federal Commissioner of Taxation 96 ATC 4898 and Hollis, it was noted that control is not the sole determinant of the nature of the relationship. The totality of the relationship must be considered.
Finally, control exerted by a principal over, for example, a distributor, for the sole purpose of protecting business interests such as intellectual property, is not considered to constitute control in the way that the word ‘control’ is used in this Ruling in determining whether a worker is an employee.
Contract versus Practical Relationship
The terms of a contract provide evidence of the nature of the relationship between the parties (see for example: Commissioner of State Taxation (SA) v Roy Morgan Research Centre Pty Ltd  SASC 288; Bridges Financial Services Pty Ltd v Chief Commissioner of State Revenue (2005) ATC 4735 and Forstaff v The Chief Commissioner of State Revenue  NSWSC 573).
However, it is necessary to consider all of the facts and circumstances of the relationship between the parties to the contract, including their conduct towards each other both at the time they entered into the contract and after the contract has been executed.
Contractual arrangements may contain a clause that purports to characterise the relationship as that of principal/independent contractor and not employer/employee. Such a term can be given little weight if it contradicts the effect of the agreement (Narich) or the practical relationship between the parties (Tolhurst). That is, parties labelling their relationship as ‘independent contractor and principal’ or ‘to produce a result’, whether by a clause in a written contract or otherwise, will have no effect where that relationship, in practice, is really one of employment.
After the execution of the contract, the conduct of the parties will also be considered to determine the full extent of the contractual relationship.
The fact that the conduct of the parties may not accord with the terms of the contract does not mean that the Commissioner considers that the contract is a sham; rather, the Commissioner will take into account the terms of any contract in addition to the conduct of the parties.
Contracts to Achieve a ‘given result’
A contract to produce a ’given result‘ is one in which the focus is on the ultimate result (usually required under a contract), rather than what must be provided during the performance of the contracted task. If the facts support a finding that the purpose of a contract is to achieve a “given result”, this is an indicator that there is a principal/independent contractor relationship.
This is particularly the case where the contract is for a fixed price, or where payment is made subject to meeting various milestones specified in the contract or at its completion.
Where a worker provides a ‘labour only’ service pursuant to a contract and is paid at an hourly or daily rate, or set rate of pay (including piecework rates and commission), this indicates that the contract is not for a given result.
If the contract is not to achieve a given result, but is rather for the labour of the worker, the arrangement will tend to have the characteristics of an employer/employee relationship (Roy Morgan Research Pty Ltd v Commissioner of Taxation  FCAFC 52 (26 May 2010)).
Independent Business (also referred to as the ‘Integration Test’)
If a worker is engaged by a business operator in the ordinary course of operating the worker’s own independent business, this indicates that the worker is not engaged as an employee.
The issue to be considered is whether the worker is conducting their own business as distinct from participating in the business of the business operator. In deciding whether or not the worker is in fact conducting their own business the Commissioner will consider a range of factors including:
- how the worker sources or obtains clients or customers. If the worker was engaged by a business operator as a result of advertising their services to the public as a normal part of carrying on a business, or as a result of winning a tender, this will usually indicate that the worker is operating a business;
- whether the worker bears the risk. It is more likely that a worker is operating their own business, rather than operating as an employee, where the worker bears the risk and makes a profit or loss as a result of the work undertaken. Similarly, where a worker has an opportunity to create their own goodwill, it is more likely that the worker is operating a business;
- whether the worker incurs expenditure in earning the income or provides their own materials and equipment. The greater the expenditure incurred in earning income and the greater the materials and equipment supplied by the worker, the more likely it is that the worker is operating a business rather than operating as an employee;
- whether basic transactional business systems are in place such as invoicing, insurance (professional indemnity and public liability), appropriate financial record keeping practices and membership of professional or trade associations;
- whether regulatory business compliance requirements are in place such as registration of business name, ABN and GST;
- whether the services provided involve the provision of labour of sufficient skill to suggest that a profession or trade is being pursued through a business;
- the number of clients or customers the worker has had over the life of the business and in relation to the specific years in question;
- whether the worker is required to perform the services personally;
- whether the worker is prevented from sub-contracting, engaging others or delegating the work to others. If the worker has engaged or arranged for others to undertake work in conjunction with themselves this is likely to indicate that the worker is operating a business rather than providing services as an employee;
- whether the worker was previously employed by the business operator; and
- how long the worker has been in business.
Notwithstanding the above, it is still possible for workers who normally operate independent businesses to work as casual employees from time to time. In particular, it is not unusual in the building and construction industry for tradespeople operating genuine independent businesses for most of the time, to be occasionally engaged as casual employees for larger jobs carried out by an employer.
For example, an independent electrician engaged by an electrical maintenance company to work as part of a team, being paid at an hourly rate and working under supervision may be treated as a casual employee resulting in payments received being subject to payroll tax. However, before making a final decision, all factors relating to the relationship would need to be considered.
Power to Delegate
The power to delegate is a factor that firmly indicates that the worker is an independent contractor rather than an employee (Australian Air Express Pty Ltd v Langford  147 IR 240).
The power to delegate in this context refers to the capacity of the worker to engage others to undertake the services for which the worker was engaged. In these circumstances, the worker is the party responsible for paying the other persons.
A common law employee delegating tasks to other employees is fundamentally different to the power to delegate exercised by a contractor. When an employee asks a colleague to undertake certain tasks, the employee is not responsible for paying that colleague.
In a principal/independent contractor relationship, the power to delegate will generally be implicit, as the focus is generally on achieving a result rather than obtaining the services of any particular person.
Where a business operator claims that the workers engaged have the power to delegate their work, they will need to produce evidence that the delegation power is actually exercisable in practical terms. The right to delegate must always be initiated and carried out by the independent contractor and not be controlled by the business operator.
If the worker performs all of the work and in practice does not engage others to assist with the performance of the work, or where the business operator provides a replacement worker when the worker is unable to provide their services, it is unlikely that the worker has the power to delegate.
Delegation clauses in contracts must be considered in the context of the arrangement between the parties to ensure that they accurately reflect what occurs in practice. Where there is a delegation clause in which a replacement worker must be approved by the business operator and this approval is not provided in practice, this may mean that the ‘right’ to delegate is illusory.
A worker who bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of the work indicates that the worker is an independent contractor. An independent contractor typically carries their own insurance and indemnity policies.
Provision of Tools & Equipment
Providing assets, tools and equipment and incurring expenses and other overheads indicates that the worker is an independent contractor.
However, providing the necessary tools and equipment is not necessarily inconsistent with an employment relationship because an employee is likely to be reimbursed or receive an allowance for providing their own tools and equipment.
The courts have considered a number of other factors in determining whether an employer/employee relationship exists. Those suggesting an employee/employer relationship exists include:
- the right to suspend or dismiss the worker;
- the obligation to work;
- working set and regular hours;
- the payment of a regular or fixed remuneration;
- the deduction of income tax;
- providing superannuation benefits, annual leave, sick leave and long service leave; and
- requiring the worker to wear a company uniform.
Lease or Bailment Arrangements
The courts have considered that an employer/employee relationship will generally not exist where there is a lease or bailment arrangement. These arrangements involve payments for the right to use or exploit property rather than for the provision of services.
An example of a bailment arrangement is the relationship that exists between the owner of a taxi and the taxi driver. Under this type of arrangement the taxi driver makes a payment to the owner in return for the right to use the taxi (Federal Commissioner of Taxation v De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd & Ors 98 ATC 4466; (1998) 82 FCR 507).
Payments to inter-posed entities
A common law employment relationship cannot exist between a principal and an inter-posed entity such as a company. However, payments made in these circumstances may still be subject to payroll tax under the contractor or avoidance arrangement provisions.
With respect to partnerships, raising invoices in a partnership name or making payments to joint bank accounts does not on their own prove the existence of a legally constituted business partnership. If the other partner is not providing services in relation to the payment and no formal partnership agreement has been prepared, it is unlikely it would be accepted that there is an agreement with an interposed entity.
Comparison of Employee and Independent Contractor Indicators
The following table outlines employee and contractor indicators in terms of the various factors utilised by the courts in determining whether a worker is an employee or an independent contractor.
|Factor||Employee Indicator||Independent Contractor Indicator|
|Control||The worker is subject to the direction of the business operator, or the direction of an employee of the business operator, as to where, when and how the work is to be performed.||The worker is free to decide the manner in which they will complete the task and achieve the agreed result.|
|Payment||The worker is paid on a time basis or at ‘piece rates’.|
The business operator pays the worker on the basis of a quote to achieve a set result (generally without regard for the time taken).
Payment is made to an interposed entity.
|Provision of labour/materials||The worker wholly or predominantly provides labour.|
The business operator supplies all or most of the materials and equipment necessary for the worker to perform their services.
Where the worker provides their own tools or materials they are usually reimbursed or paid an allowance.
|The worker supplies all or most of the materials, equipment and tools needed to complete the contracted work (not just tools of the trade or a motor vehicle used to drive to and from a work site).|
|Entitlements||The worker receives superannuation, sick leave, recreation leave or long service leave or is paid extra in lieu of such entitlements.||The worker makes provision for their own superannuation and is not entitled to sick leave, recreation leave or long service leave.|
|Tax||Income tax is deducted from the payments made to the worker.||Income tax is not generally withheld from the payments made to the worker.|
However, a worker can request a business operator to withhold tax from payments made to them (see Section 12-55 of Schedule 1 to the Taxation Administration Act 1953 (Cwlth)). In these cases, the voluntary withholding of tax is not necessarily indicative of an employer/employee relationship.
|Hours of work||The worker works set hours (either by agreement with the business operator or under an award).||The worker works the hours necessary to complete the task to the standard, and within the timeframes, specified by the business operator.|
|Continuity||The worker has been working for the business operator for a continuous extended period of time.||The worker does not provide services to the business operator on a regular or continuous basis.|
|Representation to the public||The worker is recognised as part of the business operator’s business.||The worker is not seen as part of the business operator’s business; that is, the worker is recognised as operating their own business.|
|Responsibility for quality||The business operator, not the worker, is legally responsible for the quality of the work performed by the worker.||The worker is legally liable for the quality of the work performed.|
|Delegation||The worker is required to perform the work personally (they are not able to delegate or subcontract the work).||The worker employs others to assist them in doing the work, or is able to delegate or subcontract the work to other persons of their choice.|
|Insurance and licences||Maintained by the business operator.||The worker maintains relevant and necessary licences and insurance policies.|
|ABN||The worker does not have an ABN.||The worker has an ABN.|
|Risk||All risk is borne by the business operator.||The worker bears the commercial risk of deriving a profit or suffering a loss for the work performed and incurs significant expenses in deriving income.|
Payments are reduced to cover the cost of rectifying defects.
|Dismissal/resignation||The business operator can suspend or dismiss the worker, or the worker can cease to work for the business operator, regardless of whether the worker has completed any particular task or not.||The worker is free to choose whether to accept or refuse work from the business operator.|
Each case must be considered on its own facts using the principles identified by the courts and tribunals as a guide. The decision on whether a worker is an employee cannot be made on the basis of only a few features of the relationship. In each case it is necessary to consider the totality of the relationship between the business operator and the worker and this involves considering a wide range of factors.
Some of these factors may suggest that the worker is an employee, whilst other factors may suggest that the worker is an independent contractor (Commissioner of State Revenue v Mortgage Force Australia Pty Ltd  WASCA 24).
Additionally, as noted in the Purpose section of this Ruling, if it is determined that an employer/employee relationship does not exist, consideration must still be given to whether the contractor provisions apply.
If the position is not clear, professional advice should be sought as there are complex legal issues to be considered. Alternatively, the relevant state or territory Revenue Office may be contacted for further information.
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