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Employee or independent contractor –– PAYG & SG –– part 1

The law in Australia in relation to who is an employee or independent contractor has been developed over many years. There have been a number of important recent developments in this field that require employers and those engaging contractors to review their operations and make sure they are compliant and not at risk. The law is complex and evolving (eg, gig economy workers). There are different laws in play and severe penalties apply including jail and reputational damage for getting it wrong.

Note that there are still many arrangements that we come across where a person may be treated as a contractor but we query whether the nature of the arrangement would withstand scrutiny as to whether the relationship is one of a true independent contractor.

This is our first newsfeed article in a series designed to outline some of the issues relating to this key issue. We will also be presenting on this topic in our upcoming webinar series in 2022.

Who is an employee?

The traditional master–servant and control test has applied for determining who is an employee for many years. In more recent years the courts developed a multi-factorial approach of determining whether someone was more likely to be an employee compared to an independent contractor (see: Hollis v Vabu Pty Ltd [2001] HCA 44 ‘Hollis v Vabu’ and On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366 ‘On Call’).

Who is an independent contractor?

This question is probably more easily answered from the perspective of who is not an independent contractor. An independent contractor is not someone who:

  • is an employee; or
  • receives payments wholly or principally for that person’s labour (eg, they do not have the right to substitute someone else to produce the result nor do they have significant equipment).

An independent contractor is a person who is typically running their own business and the person engaging their services has little direction or control in respect of how that service is supplied (eg, a plumber who repairs a blocked drain in a rental property).

The ATO in its ruling TR 2005/16 on ‘Income tax: Pay As You Go – withholding from payments to employees’ at [17] states:

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 principal/independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

When does an obligation arise to withhold Pay As You Go (PAYG)?

Most are aware that PAYG must be withheld from salary and wages paid to employees. However, what withholding rules apply to contractors?

The rules surrounding PAYG withholding has created a critical distinction between employees and contractors. The PAYG withholding rules exist in the Tax Administration Act 1953 (Cth) Sch 1 Pt 2-5 (s 10-1 to 20-80). Section 12-35 states:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

TR 2005/16 maintains that the term ‘employee’ has an ordinary meaning. However, in regard to independent contractors, PAYG withholding does not occur, thereby highlighting the fundamental distinction between independent contractors and employees. As a result, various tests have been used to determine who is an employee and who is a ‘true’ independent contractor. The ATO in TR 2005/16 at [18] states:

Whatever the facts of each particular case may be, there is no single feature which is determinative of the contractual relationship; the totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or independent contractor.

The ATO will typically take the view that a worker is an employee and not an independent contractor if they are remunerated for their personal labour, perform the work personally and are paid by reference to hours worked. Not much regard is given to the contractual terms and the question is generally determined having regard to the multi-factorial approach as per Hollis v Vabu and On Call.

Superannuation guarantee (SG)

The distinction between who is an employee, as compared to who is an independent contractor, also arises in relation to who must provide the minimum level of SG contributions to a complying superannuation fund. Section 12 of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA) provides that the terms ‘employee’ and ‘employer’ have their ordinary meanings but s 12 expands those meanings. In particular, s 12(3) of the SGAA provides that in addition to a common law employee:

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.

The ATO’s view on whether a worker is subject to SG is set out in SGR 2005/1 ‘Superannuation guarantee: who is an employee?’. The ATO refers to the multi-factorial approach and a range of key factors that must be considered. Paragraph 11 of SGR 2005/1 states:

For the purposes of subsection 12(3), 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 of delegation); and
  • the individual is not paid to achieve a result,

the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

Section 12(3) was recently considered by the Full Federal Court in Dental Corporation v Moffet [2020] FCAFC 118 in relation to a dentist who claimed SG in relation to his arrangement with Dental Corporation. (Dental Corporation’s application for special leave to appeal to the High Court was denied earlier this year.) The Full Federal Court stated that it was unnecessary under s 12(3) to consider whether Dr Moffet’s services were provided in an employment-like setting as reflected in the following extracts from this decision:

  1. In our opinion, what s 12(3) requires is that: (a) there should be a ‘contract’; (b) which is wholly or principally ‘for’ the labour of a person; and (c) that the person must ‘work’ under that contract. There is no doubt that Dr Moffet provided his work under the Services Agreement so the requirements of (a) and (c) are met.
  1. For that reason, the question of whether the Services Agreement, from Dental Corporation’s perspective, was wholly or substantially ‘for’ Dr Moffet’s labour should be answered in the affirmative. It was substantially for that purpose.

[108]  Finally, we would have rejected Dental Corporation’s submission in this Court that the employment-like setting test should be answered by reference to the same kinds of indicia, especially control which govern the general issue of whether one person is employed by another. This would collapse s 12(3) (on the assumption that On Call … is correct) into the ordinary test of employment. It is clear that is precisely what s 12(3) does not mean.

The focus under s 12(3) of the SGAA is therefore on the purpose of the contract between the principal and worker and not on the ordinary meaning of employee and employer. Note that there is no equivalent statutory extension like s 12(3) for PAYG purposes.

Recent High Court decision –– who is a casual employee?

The High Court in Workpac v Rossato & Ors [2021] HCA 23 (Workpac v Rossato) gave significant weight to the terms of the employment contract between Workpac and Mr Rossato in finding that Mr Rossato was properly characterised as a casual employee and therefore was not entitled to the usual leave entitlements that permanent employees are typically entitled to. The decision of Kiefel CJ, Keane, Gordon, Edelman, Steward and Gleeson JJ was unanimous and some key extracts at [57] – [66] are as follows:

  1. A court can determine the character of a legal relationship between the parties only by reference to the legal rights and obligations which constitute that relationship. The search for the existence or otherwise of a “firm advance commitment” must be for enforceable terms, and not unenforceable expectations or understandings that might be said to reflect the manner in which the parties performed their agreement. To the extent that Bromberg J expressed support for the notion that the characterisation exercise should have regard to the entirety of the employment relationship, his Honour erred.
  2. To insist upon binding contractual promises as reliable indicators of the true character of the employment relationship is to recognise that it is the function of the courts to enforce legal obligations, not to act as an industrial arbiter whose function is to synthesise a new concord out of industrial differences. …
  1. … the present case is concerned with the character of an employment relationship, a question the resolution of which has no significance for the rights of persons who are not privy to the relationship. The analysis in Hollis v Vabu affords no assistance, even by analogy, in the resolution of a question as to the character of an employment relationship, where there is no reason to doubt that the terms of that relationship are committed comprehensively to the written agreements by which the parties have agreed to be bound.

A seminar paper delivered at The Tax Institute’s ‘2021 National Superannuation Conference’ in October 2021 by Suzanne MacKenzie, Barrister, noted that there are several other important decisions pending in the High Court including appeals from the Full Federal Court in Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 119 and CFMEU v Personnel Contracting ([2020] FCAFC 122 which may give more force to the contractual terms between the parties than if the multi-factorial approach were applied. The decision in Workpac v Rossato is important as the High Court did give primacy to the employment contract and has distinguished the multi-factorial test applied in Hollis v Vabu as confirmed in On Call. Suzanne MacKenzie also noted that there is doubt about the correct approach to determining whether a worker is an employee or an independent contractor. Further, she noted that these cases are also likely to examine whether a worker needs to be running their own business in order not to be classified as an employee.

Thus, there have been numerous recent developments in this area of law which advisers need to be aware of and review their client base and adjust their advice accordingly. We are closely monitoring these developments to keep our clients appraised.


The distinction between who is an employee and who is an independent contractor has been an evolving and lengthy process. There have been various tests that have developed over the years including the master–servant control test, the multi-factorial test and there appears to be a recent trend towards placing more focus on the terms of the contract following the recent High Court’s decision in Workpac v Rossato. We anxiously await the outcome of the two Full Federal Court cases on appeal to the High Court.

We will be preparing further newsfeed articles in coming months ‘drilling down’ on other important ramifications of the employee versus independent contractor distinction. We will examine the payroll tax, workcover, employment law and other aspects including vicarious liability of the employee versus independent contractor question. There are so many aspects that to this critical distinction. So much so, that getting it wrong can be the downfall of a business given the severe penalties and other ramifications that can follow.

It is particularly important now for all businesses and advisers to examine their situations given the above developments in this area of the law. Please contact us should you need any assistance or advice.

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By Daniel Butler ([email protected]), Director and Bryce Figot ([email protected]), Special Counsel DBA Lawyers

Note: DBA Lawyers presents regular SMSF Online Updates. For more details or to register, visit or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

7 December 2021

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