E Group Security Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 1190

Background

The plaintiff sought review of a determination by the Chief Commissioner, for the purposes of liability to payroll tax under the Payroll Tax Act 2007 (“Payroll Tax Act”), that the plaintiff was an “employment agent” and liable for payroll tax on payments made to its service providers. The determination related to the provision of security guarding services by the plaintiff to its clients. The key legal issue was whether the arrangements between the plaintiff and its clients (or, alternatively, the arrangements between the plaintiff and its wholly-owned subsidiaries) were “employment agency contracts” within the meaning contained in s. 37 of the Payroll Tax Act.

A further issue arose as to whether interest, which was included in payroll tax assessments issued by the Chief Commissioner, should be remitted and, if so, whether in whole or in part.

The statutory framework

The relevant provision of the Payroll Tax Act under consideration was s. 37(1), which states:

“(1) For the purposes of this Act, an employment agency contract is a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent.”

Submissions

The plaintiff’s primary submission was that it does not procure the services of the security guards “for” (in the sense of “in and for the conduct of the business of”) its clients (referring to UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 (“UNSW Global”) at [62] per White J. In this regard the plaintiff submitted:

1. the Security Industry Act 1997 precluded the integration of workers providing security services into a client’s workforce, by requiring the maintenance of control by the plaintiff over the security guards whose services are provided to its clients. In particular, the plaintiff submitted that the Security Industry Act 1997 expressly prohibited the hiring of security guarding labour to unlicensed persons and the delegation of the functions of a master licensee to an unlicensed person, and required that individuals carrying out security activities must be employed by the holder of a master licence;
2. the correct test is whether the service provider is integrated into the client’s workforce, not whether the services performed by the service provider are integral to the client’s business. In this regard the plaintiff submitted that the focus of the enquiry is whether the manner in which services were provided was indicative of the service provider being integrated into the client’s workforce and working in much the same manner as the client’s employees;
3. key to demonstrating that the security guards were not integrated into the clients’ workforces is that the plaintiff strictly maintains control of all of its security guards, and its clients do not exercise any degree of control over its security guards. In particular, the plaintiff submitted that the security guards follow the plaintiff’s directions and instructions and remain distinctly within the plaintiff’s command, control and reporting structure, and the security guards remain separate from the command, control and reporting structure that applies to the clients’ workforces; and
4. other factors that demonstrated its security guards were not integrated into the clients’ workforces included:
   1. that the security guards wore uniforms with E Group Security’s branding; and
   2. that the security guards use publicly available facilities and do not use staff rooms available to the clients’ staff.

In relation to the Chief Commissioner’s alternative contention regarding the plaintiff’s wholly-owned subsidiaries, the plaintiff submitted that its arrangements with its wholly-owned subsidiaries were not employment agency contracts for the following reasons:

1. the wholly-owned subsidiaries do not “procure” the services of security guards for the plaintiff (as the wholly-owned subsidiaries are not involved in any contractual relationship with the third-party subcontractors and simply perform a payroll function for the plaintiff – the contractual relationship by which the services are procured being said to be between the plaintiff and the third-party subcontractors); and
2. the plaintiff is not a “client” of its wholly-owned subsidiaries in the relevant sense, because of the way in which the entities operate as a single unified organisation.

The Chief Commissioner submitted:

1. the following indicia are relevant to determine whether a worker works “in and for the conduct” of a business:
   1. the location at which the services are provided by the workers;
   2. the regularity with which the workers provide the services to the client;
   3. the level of interaction (if any) between the workers and the client’s customers and employees;
   4. the level of direction or instruction (if any) provided by the client to the workers;
   5. the workers’ access to and use of the client’s staff facilities; and
   6. the relevance or connection, to the goods or services provided by the client to its customers, of the services provided by the workers to the client;
2. in response to the plaintiff’s submission regarding the Security Industry Act 1997, this did not apply to all clients or to all services being provided, as some substantial services provided by the plaintiff’s security guards (such as concierge services) were not security activities caught by the legislation;
3. the focus of the employment agent provisions is not upon integration into the workforce per se, but integration into the conduct of the client’s business;
4. direction and control is only one indicium of the “in and for” test, and the evidence discloses, at least, some direct control and direction from the clients, as well as indirect control via the regular quality assurance procedures;
5. the workers provided services regularly and frequently for the client;
6. the workers performed tasks that were essential to the functioning of a client’s business (in many cases, enabling the client to discharge its own obligations such as under its liquor licence or under contracts with its own clients);
7. the workers provide the client’s other workers and the client’s customers with a safe place of work, or environment; and
8. the workers perform services that are tailored to the client’s unique circumstances.

The Chief Commissioner also contended, in the alternative, that on a proper characterisation of the arrangements between the plaintiff and its related entities during the Tax Years, each related entity was an employment agent and the plaintiff was the client, with the effect that the plaintiff was jointly and severally liable for the unpaid payroll tax of the related entities on the payments to the workers.

Decision

Ward CJ endorsed the view of White J in UNSW Global, that the relevant test to apply in determining whether the arrangements between the plaintiff and its clients were “employment agency contracts” within s. 37 of the Payroll Tax Act, required “an analysis as to whether the workers in question were integrated into the client’s business (or added in effect to its workforce), not whether the workers or the provision of their services were integral or essential (as opposed to ancillary) to the client’s business or workforce; nor whether the client could itself have performed the relevant tasks” (at [323]).

Her Honour accepted the indicia submitted by the Chief Commissioner as being relevant when determining whether there is the requisite integration of the service providers into a client’s workforce, and noted that the analysis is a fact sensitive one.

In applying the indicia, Ward CJ made the following findings:

1. the capacity to direct or control the tasks that are performed, or the manner in which they will be performed, is a relevant but not necessarily determinative consideration;
2. her Honour accepted the plaintiff’s evidence that the security guards were directed to comply with the plaintiff’s instructions and to report back to the plaintiff;
3. the location at which the services were provided by the workers is generally that of the client’s premises;
4. there was a regularity with which the workers provide the services to the clients in the commercial sector but there was a more ad hoc provision of services in the health and event sectors;
5. the level of interaction between the workers and the client’s customers or contractors varies but there is generally at least some interaction between them;
6. there is some level of direction or instruction reserved to the client under the contractual documentation that was in evidence, though her Honour did not accept that it would extend to the control over or giving of binding instructions as to security decisions of a kind required under the legislation to be made by the security licence holder;
7. the workers’ access to and use of client staff facilities was limited; and
8. there was an obvious significance to the clients of the security services provided by the plaintiff’s workers.

Balancing all of those factors, Ward CJ concluded that the arrangements by which the plaintiff provided security guard services to the clients in the present case did not constitute “employment agency contracts”, and did not give rise to a payroll tax liability.

In relation to particular categories of clients, Ward CJ found:

1. for one-off clients and those clients for whom services were provided on an ad hoc basis or outside the ordinary day to day activity of the client’s workforce, there was no basis on which the security guards could be said to be integrated into the client’s workforce;
2. security guards (particularly those monitoring crowd control or bag screening at events, as well as those located in commercial buildings) need to be readily distinguishable (in much the same way that police officers are meant to be readily distinguishable to the public), and this tended against a finding of the requisite degree of integration;
3. for the club and pub clients, the plaintiff’s personnel were not sufficiently integrated into the client’s workforce, on the basis the evidence indicated that the security guards use public facilities, they take instruction from the plaintiff, and they wear distinguishing clothing;
4. her Honour had “some concern” with the commercial buildings category because “there seems to be less distinction in the clothing that is worn … and it might be that a casual observer would not appreciate the difference between a security guard and, say, a receptionist or concierge if the guard were sitting at the concierge desk” (at [335]).
5. Ward CJ was also concerned with the evidence of consistent invoicing for concierge services at a number of buildings, however her Honour found this represented a small proportion of the work provided by the plaintiff’s guards. Ultimately Ward CJ found that while:
   
   
   “it may be that an ordinary observer would have difficulty distinguishing between the E Group Security guard seated at the concierge desk in those particular buildings from the client’s employees, I am not persuaded that, as a whole, the E Group Security guards are indistinguishable … [and] considered with the other relevant factors as to control, use of client’s facilities, and E Group Security uniforms for example, I find that the E Group Security guards in the commercial buildings are not sufficiently integrated in the relevant client’s workforce” (at [336]); and
6. Ward CJ also had “some concern” with a food industry client, Baiada, particularly because the guards performed weighbridge tasks. However, the Court was satisfied that the plaintiff’s guards were not integrated into the Baiada workforce because of a combination of factors: in particular, the fact the guards perform a security function, the plaintiff’s workforce was physically separated from Baida’s workforce, and they wore highly distinctive clothing.

In relation to the Chief Commissioner’s alternative contention, that the arrangements between the plaintiff and its related entities were “employment agency contracts”:

1. Ward CJ found that the term “client” in s. 37(1) should be given its ordinary meaning: that is:

   “as someone with whom there is some form of relationship whereby (for reward or otherwise) one party does something on behalf of or at the request of another at least where that is in a professional or business context” (at [340]).

   In that sense, her Honour noted that

   “it might be said that E Group Security is the client of the Related Entities insofar as the Related Entities perform an invoicing service for E Group Security but that does not make E Group Security a client for the purpose of procuring of workers. However, more likely to my mind is that the payroll arrangements were not ‘client’ arrangements but were instances of compliance by the subsidiary with a direction from the parent company” (at [340),

   but this ultimately turned on whether the related entities “procured” the services of the security guards for the plaintiff; and

2. her Honour was
   
   
   “not persuaded that there was an agreement between E Group Security and its subsidiaries to procure the workers”.

Ward CJ accepted that the intent of the agreements between the related entities was that the payroll functions would be performed by the subsidiaries, but that the security guards (though paid via the subsidiaries) were procured as such by E Group Security. Her Honour accepted that the fact invoices refer to services having been ‘supplied’ by E Group Protective Services raises concern regarding this point, did not warrant a conclusion contrary to E Group Security’s position. (at [341]).

Ultimately, Ward CJ found that the related entities did not procure the security guards for the plaintiff but, rather, facilitated E Group Security’s provision of services to its clients.

Remission of interest

In light of the above findings it was not necessary for the Court to decide the remission of interest issue, however her Honour noted that, if a taxpayer acts on the basis of any advice or recommendation from the Chief Commissioner and ultimately it is shown to be incorrect, then that may provide a basis to exercise the discretion to remit interest.

Orders

The Court ordered that:

1. Pursuant to s 101(1)(a) of the Taxation Administration Act 1996 (NSW), revoke the payroll tax assessments numbered 117241993.
2. Direct that the parties file brief written submissions on the question of costs within 14 days, with a view to dealing with the matter on the papers if possible.

Link to decision

https://www.caselaw.nsw.gov.au/decision/17c00cf0884a8d29371686bf