Contractors and Employees Policy
The aim of this policy is to provide guidance on correctly classifying contractors and employees when engaged to perform services to the Institute.
This policy concerns all contractors and consultants employed by the Institute to provide services.
3.1 When engaging a contractor/consultant/casual teacher to provide services to the Institute, every effort should be made to engage them as employees. Where this is not possible they may be engaged through an intermediary entity (i.e. a company or trust). However, the Institute may have superannuation and taxation obligations relating to the engagement of the person where an intermediary entity is used.
3.2 To determine whether the Institute has superannuation or taxation obligations related to the engagement of a contractor/consultant/casual teacher through an intermediary entity depends on whether there is an implied common-law employee relationship or if the independent contractor is engaged wholly or principally for labour.
3.3 The points below provide general guidance as to how an assessment can be made as to whether there is an implied common-law employee relationship or if the independent contractor is engaged wholly or principally for labour. Advice should be sought from the Director, CIT Corporate Services where there is any question as to the classification of the contractor/consultant/casual teacher.
3.3.1 There are a number of indicators to determine whether a common-law employee relationship existed. The traditional test of an employment relationship is the 'control test', that is, does the employer have the right to control how and what the contractor does. The Courts now tend to regard it only as one of the indicators, even though it is still an important one. The other indicators include the mode of remuneration, the obligation to work, the hours worked, and the power to delegate performance of work. The final decision is generally a fine balance of all the indicators rather than one overriding test. Table 3.1 provides a description of these indicators.
Common law employee relationship indicators
|Right to control work||This test involves who has the right to control how, when and where the work is done. The control does not have to be exercised - just the right to it is sufficient to imply an employer-employee relationship.|
|Supervision, remuneration and finances including the provision and maintenance of equipment|
Employers generally supervise the conduct and work of their employees, as well as remunerating them based on time. Additionally, they invest in their staff by way of training and providing equipment for them to work. The High Court postulated in Federal Commissioner of Taxation v Vabu Pty Ltd:
It is significant to note that one of the considerations mentioned by Meagher JA in the Taxation decision [the SGA Act] as indicating that the couriers were independent contractors was that they bore the 'very considerable' expense of providing, maintaining and insuring their own vehicles.
|Obligation to work||Employees generally are obliged to work certain days or hours to continue in their employment|
|Hours of work and place of work||Employers have the right to dictate the hours and place of work of their employees.|
|Provision of holidays, deduction of income tax and payment of superannuation||An employer-employee relationship could be implied if a contractor is provided with paid leave entitlements such as holidays. Additionally, an employer-employee relationship could also be implied where payments to the contractor have income tax deducted from the gross amount.|
|Right to delegate to someone else||Legal precedent has shown that a contract is a contract for a person's labour if only that person is able to perform the tasks required under that contract. If the contract leaves it to the discretion of the contractor as to who performs the work, then the contract is not a contract for the labour of a particular person.|
|Exclusive right to the services of the particular worker||Employers generally have the right to the exclusive services of their employees. If a contractor works only for one organisation, an implication could be made that an employment relationship exists.|
|Right to suspend or dismiss the person engaged||Employers generally have the right to suspend or dismiss an employee when their performance does not meet the required standard. A dispute involving a contractor will generally involve alternate remedial action such as mediation or non-payment until the service standard is remedied.|
|Whether the worker is an emanation of the employer and works as part of the employer's business or pursues the worker's own business - the business integration test||The integration test examines whether the individual's services are an integral part of the employer’s business or merely ancillary to it. The ATO, in Draft Superannuation Guarantee Ruling SGR 2004/D1, also considered it necessary to keep in mind the distinction between a worker operating on his or her own account and a worker operating in the business of the payer.|
|Providing skilled labour or labour which requires special qualifications, whether able to make an independent career|
The use of professional or skilled labour implies that the contractor can make an independent career. A contractor with an independent career can imply that the contractor could be conducting his/her own business using those skills. This generally suggests that a contractual relationship exists rather than an employer-employee relationship.
However, professionals can be engaged to provide services under a contract that is an employer-employee relationship.
|The way the parties themselves have characterised their relationship||Contracts often include a specification that the worker is not to be treated as an employee and therefore, the contract is not wholly or principally for labour. This specification cannot stand against the true nature of the relationship if it is to a contrary effect. However, it was treated as decisive in Building Workers Industrial Union of Australia and Ors v Odco Pty Ltd where matters of fine judgment were involved.|
Source: ANAO, based on legal advice, Department of Finance and Administration Superannuation Circular Number 43 and ATO's Superannuation Guarantee Ruling 93/1 (Note - Superannuation Guarantee Ruling 93/1 was superseded by Draft Superannuation Guarantee Ruling 2004/D1 in August 2004).
3.3.2 These indicators are not always straightforward as there may be some indicators within a contract suggesting an employment relationship, and others suggesting an independent contractual relationship. Each individual indicator has to be balanced against the others to determine the overall nature of the relationship.
Engagement - wholly or principally for labour
3.3.3 Where a contract has been deemed to be one with an 'independent contractor' rather than a common-law employee relationship, it was then necessary to determine whether it is wholly or principally for labour. If it is, the PB Act applies. Table 3.2 below describes the indicators used to determine whether the contract is wholly or principally for labour. Again, these indicators are not always straightforward, and a balanced judgement has to be made.
Criteria for determining whether a contract is wholly or principally for labour
|Contract principally for labour||A contract is principally for labour if the contract is 'chiefly' or 'mainly' for labour. Labour includes mental and artistic effort as well as physical work. This is opposed to a contract that is to produce a given result. For example, the production of an advertisement.|
|Contract for particular person - ie. No right to delegate||The contract is for the labour of the person who works under the contract, that is, the contractor has no right to delegate work to another party.|
|Contract is with a natural person||A contract for labour inherently requires a contract with an individual as opposed to a contract with a company etc.|
|Payment for time rather than outcome/results|
Payment for outcome/results implies that:
the contract is for a particular result;
the contractor is free to choose the manner in which the result was produced;
duties being performed by the contractor are discrete and separate from the business of the organisation;
the contractor is paid a set fee; and
the fee or final instalment is payable upon completion of the task
|The way the parties themselves have characterised the relationship||Contracts often include a specification that the worker is not to be treated as an employee and therefore, the contract is not wholly or principally for labour. This specification cannot stand against the true nature of the relationship if it is to a contrary effect. However, it was treated as decisive in Building Workers Industrial Union of Australia and Ors v Odco Pty Ltd where matters of fine judgment were involved.|
Source: Based on legal advice, Department of Finance and Administration Superannuation Circular Number 43 and ATO's Superannuation Guarantee Ruling 93/1 (Note - Superannuation Guarantee Ruling 93/1 was superseded by Draft Superannuation Guarantee Ruling 2004/D1 in August 2004).
3.3.4 If a contract is found to be wholly or principally for labour, the Commonwealth employer is obligated, in accordance with the PB Act, to make superannuation contributions for the benefit of the contractor.
Interpretation of the indicators
3.3.5 The indicators used to determine whether a common-law employment relationship exists or a contract is wholly or principally for labour, have to be balanced against each other.
3.3.6 The courts, over time, have placed differing levels of emphasis on the various indicators in different cases. Because each contract has its own particular characteristics, it is difficult to assess how a court would interpret particular facts in each situation, and, what emphasis would be placed on the different indicators. This means that, when contracts are being interpreted, conflicting, yet legitimate, viewpoints can be established on the facts of the same contract.
- Australian Taxation Office Taxation Ruling TR2005/D3 - Income Tax: Pay As You Go - withholding from payments to employees
- Superannuation Guarantee Ruling SGR 2005/1 - Superannuation Guarantee: who is an employee?
- Australian National Audit Office Audit Report No.13 2004-05 Superannuation Payments for Independent Contractors working for the Australian Government Public Sector Management Act 1994
Institute - Canberra Institute of Technology
SG Act - Superannuation Guarantee (Administration) Act 1992.
PB Act - Superannuation (Productivity Benefit) Act 1988
PAYG - Pay as you go taxation
ITAA - Income Tax Assessment Act 1997
Employees - people employed by the Institute under the Public Sector Management Act 1994 and paid through the Personnel System.
Contractor/Consultant/Casual Teacher - person or company engaged by the Institute to provide services or a product.
ATO - Australian Taxation Office
6. Policy Contact Officer
For more information about this policy contact Executive Director, Corporate Services.
Contact CIT Student Services on (02) 6207 3188 or email firstname.lastname@example.org.
Policy No: 2017/437
Approved: February 2014
Next Review: September 2023
Category: Staff Policies, Corporate Policies
Policy Owner: Executive Director, Corporate Services
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