Commissioner's practice note: Employment Agency Contracts Guidelines
Aim
This Commissioner’s Practice Note is relevant to businesses that procure the services of workers for other businesses. It explains the Chief Commissioner’s application of the employment agency contract provisions in Division 8 of Part 3 of the Payroll Tax Act (“the Act”).
The Practice Note will assist customers to decide whether their particular arrangements constitute an employment agency contract, and if so, which payments are wages for payroll tax purposes.
Note: Failure to pay tax could result in interest and penalty tax being incurred under the Taxation Administration Act 1996.
Overview
- An employment agency contract is defined in s.37(1) of the Act as a contract under which an employment agent procures the services of a service provider for a client of the agent.
- A service provider may be a natural person who performs work for the client, or an entity that engages workers to perform work for the client.
- If a contract is an employment agency contract:
- the “employment agent” who procures a service provider for a client is taken to be an employer (s.38 of the Act);
- the service provider may engage workers to perform the work required under the contract;
- the persons who perform the work for the client’s business are taken to be “employees” of the employment agent (s.39 of the Act);
- any amounts paid or payable by the employment agent under the contract, including amounts attributable to non-labour costs or commissions payable to another employment agent, are taken to be wages (s.40(1) of the Act); and
- the client of the “employment agent” does not incur payroll tax on payments to the agent under the contract.
- The employment agent performs most of the administrative functions normally performed by an employer, including payment of remuneration, and may include withholding income tax and paying employer superannuation contributions.
- The employment agency contract provisions apply when workers are engaged by an agent to work in and for the conduct of the client‘s business, in a similar way to an employee.
- A contract is not an employment agency contract if:
- there is a contract of employment between the worker and the client; or
- The worker performs services for the client’s benefit, but does not work in and for the conduct of the client’s business in a similar way to an employee.
Commissioner’s Practice Note
1. What are the key elements of an employment agency contract?
- There is a contract, agreement, arrangement or undertaking.
- The contract requires the agent to procure a service provider for the client.
- The service provider may be the person who performs the work under the contract, or may engage workers to perform the work.
- It does not matter if the service provider or worker was initially recruited by the client.
- The workers are added to the workforce of the client and perform work in a similar way to employees, but not necessarily as employees of the agent.
- A contract may be an employment agency contract even if the agent is not an employment agent or labour hire firm as those terms are commonly understood, or as defined in other legislation[1].
2. The form of employment agency contracts
An employment agency contract may be written or oral. The contract specifies the arrangements between the employment agent and the client, including the arrangements for the provisions of services by the service provider for the client. There may be a three-party contract between the employment agent, the service provider and the client, or separate two-party contracts between the agent and client, and between the agent and service provider.
3. Procuring a service provider for a client
A service provider is “procured” by an employment agent for a client if the agent causes the services of a service provider to be provided to the client with the expenditure of care or effort by the agent under an arrangement (or contract) between the agent and the client[2]. The service provider is the person responsible for performing the work required under the contract, but may engage workers to actually perform the work.
Example 1
An agent enters into a contract with a shopping centre manager under which the agent agrees to complete specified cleaning tasks in the shopping centre after business hours each day.
The agent engages contract cleaners to complete the cleaning tasks required under the contract.
The agent has procured the cleaners (service providers) for the shopping centre manager (the client) under an employment agency contract.
If a service provider is initially recruited by a client, and the initial contract or arrangement between the service provider and the client is subsequently replaced by a contract between the agent and the client, the agent is considered to have “procured” the service provider for the client[3].
Example 2
Security guard Ian Young reaches agreement with ABC Bank to provide security services at the Bank’s premises. The Bank provides details of the agreed arrangements to XYZ Security Services, which then enters into contracts with the Bank and with the security guard to provide to services of the security guard to the Bank.
XYZ Security has procured the services of the security guard for ABC Bank for the purposes of s.37(1) of the Act.
The requirement that the agent procure service providers for the client does not have to be specified in the contract. It is sufficient if it is necessary for the agent to engage workers to undertake its obligations to the client under the contract, and workers are procured for that purpose.[4]
Example 3
A contract between an agent and a client who conducts a hostel requires the agent to provide a meals service to lodgers, including food preparation on the premises, serving of meals and cleaning up, with the price based on the number of meals provided. The contract does not specify that workers have to be provided.
Staff must be engaged by the agent for the purpose of performing the agent’s obligations under the contracts. Therefore, the services of the staff are “procured” by the agent for the hostel client.
4. Meaning of working “in and for the conduct of the client’s business”
Under an employment agency contract, the workers perform work “in and for the conduct of the client’s business”. This means the worker performs work in the same way, or much the same way as would an employee of the client[5]. In other words, the workers are added to the workforce of the client to enable the client to conduct its business.
The workers perform work under terms and conditions similar to those applying to employees, although not necessarily identical terms and conditions. The workers may be supervised by managers engaged by the agent or by the client’s staff, or by both. It does not matter if the client does not engage employees who perform similar types of work.
The totality of the relationship between the business and its client and the relationship between the business and its workers must be considered. The key factors to be considered in determining whether a contract is an employment agency contract are as follows:
a) Continuity or regularity of services performed by the workers:
An indicator that a worker is working in and for the conduct of the client’s business is when the worker provides services which are ordinarily required for the operation of the client’s business. If the type of services performed by a worker are ordinarily required for continuous or regular periods, even a short term or ad hoc contract may be an employment agency contract.
Conversely, the provision of one-off or ad-hoc services that are not ordinarily required by the client is an indicator that a contract is not an employment agency contract, in which case the contractor provisions may apply[6].
b) Control and direction of workers including time and place of work
An arrangement is likely to be an employment agency contract if there is a high degree of day to day control exercised by the client over the time and place of work, and the way in which the worker provides services “in and for the conduct of the client’s business”. Such control may be exercised directly, by supervisors employed by the client.
Control similar to the control exercised over employees can be exercised indirectly, by the agent managing the way in which work is performed in accordance with the client’s requirements or specifications[7]. Indirect control may be exercised by the client specifying customer service requirements, or specifying the tasks to be performed, where when and how the work is performed, and requiring workers to comply with the client’s operating procedures that apply to employees.
c) Perceived employees
A factor indicating that a worker is working in and for the conduct of the client’s business is where there is no real or apparent distinction between the client’s employees and the procured workers, including wearing the client’s uniform, liaising with customers and other staff of the client, and use of the client’s facilities available to staff, such as a staff dining room, canteen and toilet facilities.[8]
d) Materials and Equipment
If an Agent procures workers to work in and for the conduct of the business of a client, the supply of materials and equipment by the agent under the contract does not mean the contract cannot be an employment agency contract. In Bayton Cleaning the Plaintiffs provided cleaning equipment and cleaning products required by the workers to clean sites[9]. The Court concluded that the contracts were none-the-less employment agency contracts because the cleaners were procured “for” clients’ businesses in the sense of “in and for the conduct of those businesses…”[10].
e) Services that are incidental to core business
In JP Property Services[11]Justice Kunc determined that workers procured to provide after-hours cleaning services did not work in and for the conduct of the businesses of the clients. However, this decision was subsequently rejected in the following two Supreme Court decisions:
- In Bayton Cleaning[12], Chief Justice Ward stated that a key issue in determining whether a contract is an employment agency contract is whether the worker’s services are provided to help the client conduct its business “in the same way, or much the same way, as it would through an employee” (to adapt the language of White J in UNSW Global); and there is nothing in s 37(1) of the Act, or in the decision in UNSW Global that supports a distinction between “core” services and “ancillary” or “incidental” services;
- In Securecorp,[13], Justice Payne stated:
“Kunc J [in JP Properties} appeared to suggest that if “incidental” services are provided outside of ordinary business hours, then they are not provided “in and for the conduct of a business”. I am unable to agree. The introduction of a requirement that services provided not be “incidental” to a client seems, with respect, to involve an impermissible gloss on the statute. An accountant providing after-hours technical support is, in my view, working in and for the conduct of the accounting firm. It is an irrelevant enquiry to ask, in addition, whether the services provided are provided outside normal trading hours. Much less is it relevant to enquire whether the services provided are “incidental” services. Nothing in s 37(1) or in White J’s construction of s 37 refers to “core” or “incidental” services and the enquiry suggested is not one that I would adopt.”
Consequently, the Chief Commissioner considers that the employment agency contract provisions may apply if workers are procured to work “in and for the business of a client to perform ancillary, incidental or non-core services, or where services are performed outside normal business hours.
f) Outsourcing of a business function
Outsourcing is a business practice in which business functions previously performed by employees are contracted out to a third party. Such an arrangement may constitute an employment agency contract, especially if employees who previously performed the function are transferred to a contractor along with the function. This was considered to be a factor supporting the conclusion that a contract was an employment agency contract in Bayton Cleaning.[14] Chief Justice Ward indicated that, in a very practical sense, the cleaning staff that formerly formed part of the client’s workforce, remained part of the client’s workforce for the purpose of applying the employment agency contract provisions.
In Banfirn,[15] contracts were held to be employment agency contracts in circumstances where the provision of ‘formwork services’ were outsourced by Banfirn to other businesses. The workers procured for Banfirn by those other businesses were held to be working in and for the conduct of Banfirn’s business.
5. Payments under an employment agency contract that are “wages”
Under s 40(1)(a) of the Act, any amounts paid or payable by the person taken to be an employer under an employment agency contract “in relation to” the service provider and “in respect of the provision of services in connection with the employment agency contract”are wages. Such payments are liable to payroll tax under ss 6, 7 and 13(1)(e)) of the Act. Payroll tax liability is not restricted to amounts payable to workers. Gross payments by the employment agent are taken to be wages, including amounts attributed to a service provider’s commission,[16] or to the provision of materials and equipment by the employment agent or the employment agent’s profit component.[17]
6. Examples of employment agency contracts
Example 4 – cleaners working in and for the conduct of the client’s business[18]
A cleaning company (agent) enters into an arrangement with a hotel (client) to provide housekeeping services that includes cleaning rooms. The cleaning company engages subcontractors to provide these services. The cleaners:
- are required to work at times determined by the hotel
- must wear similar uniforms to hotel employees;
- are directly supervised by the cleaning company’s supervisors;
- are required to liaise with and follow instructions given by hotel supervisors;
- must follow rules or standards of conduct applying to hotel employees, including providing a high level of customer service to hotel customers;
The cleaners supplement or add to the hotels workforce, and are working ‘in and for the conduct of the hotel’s business. Consequently:
- the cleaning company is taken to be an employer (s.38 of the Act).
- the cleaners are taken to be employees of the cleaning company (s.39 of the Act).
- the amounts paid or payable by the cleaning company to the cleaners are taken to be wages (s.40(1) of the Act).
Example 5 – engineers working in and for the conduct of the client’s business
An engineering company (agent) enters into an arrangement with a construction company (client) to provide engineering management support. Two engineers are assigned to do the work required under the contract, which includes:
- planning and execution of a major ongoing project;
- reviewing and evaluating design of manufacturing tasks;
- development and integration into existing manufacturing activities;
- delivering a range of documentation including written reports and manuals.
- the work undertaken by the 2 engineers is regularly required in the conduct of the client’s business;
- the work is performed at a place and time determined by the client; and
- the engineers are subject to the control and direction of the client.
The engineers are working “in and for the conduct of the business” of the construction company because they are working in a similar way to engineers who are employees of the company, and they supplement the Company’s workforce.
Therefore, the contract is an employment agency contract, and:
- the engineering company is taken to be an employer (s.38 of the Act);
- the 2 engineers and are taken to be employees of the engineering company (s.39 of the Act); and
- the amounts paid or payable by the engineering company to the engineers are taken to be wages (s.40(1) of the Act).
7. Example of a contract that is not an employment agency contract
Example 6 – engineers working for the benefit of the client but not in and for the conduct of the client’s business[19]
ABC Engineering enters into an arrangement with a construction company to provide the services of a mechanical engineer to review the use and performance of a piece of machinery and provide a report. The engineer is required to provide the report by a specified date, and the work will require interaction with employees of the construction company who use the machinery. The engineer arranges the times and places where the work is performed with managers and staff of the construction company. However the Construction Company does not control or direct the Engineer in performance of the contract, either directly or indirectly.
The engineer’s services were not provided in the ordinary conduct of the client’s business having regard to the following factors:
- the work is a one-off task;
- the engineer does not perform work that is regularly or commonly performed by employees;
- the engineer is not subject to the usual level of direction and control exercised over employees.
Therefore the contract is not an employment agency contract.
8. Chain of on-hire arrangements
A ‘chain of on-hire arrangement’ occurs when an employment agent procures a service provider for its client from another employment agent. In some cases there are more than two agents in a chain of on-hire.
The payroll tax liability of agents in a chain of on-hire is explained in Revenue Ruling PTA 027 Employment agency contracts: chain of on-hire which is published here: https://www.revenue.nsw.gov.au/about/legislation-and-rulings
9. Application of contractor provisions
A contract that fulfils the requirements of being an employment agency contract cannot be a relevant contract under the relevant contracts provisions in Part 3, Division 7 of the Act. However, if a contract or arrangement is not an employment agency contract, the contractor provisions may apply[20]. The relevant contracts provisions are explained in CPN 007 which can be found here: https://www.revenue.nsw.gov.au/about/legislation-and-rulings/commissioners-practice-notes
10. Misconceptions about employment agency contracts
The following common misconceptions by employers about the correct application of the employment agency provisions have been identified:
a) Contracts with ‘independent contractors’ are not employment agency contracts.
It is a mistake to believe that a contract, agreement, arrangement or undertaking cannot be an employment agency contract merely because the person undertaking the work is an ‘independent contractor’. In UNSW Global[21], Justice White noted:
“Whether the worker is to be characterised as an employee or a contractor, the employment agency contract provisions were intended to apply to cases where the employment agent provided individuals who would comprise, or who would be added to, the workforce of the client for the conduct of the client’s business.”
b) Result-based contracts or arrangements are not employment agency contracts.
Every contract under which the services of an independent contractor are procured usually includes a requirement that the contractor produce some form of “result”. Several recent Supreme Court decisions[22] have confirmed that results-based contracts were employment agency contracts because the arrangements resulted in the services of the contractor being procured to work “in and for the conduct” of the client’s business.
c) A contract or arrangement can only be an employment agency contract if the work undertaken is a ‘core business activity’ of the client’s business or if it is carried out during normal trading times
An employment agency contract may exist whether the worker undertakes core, none-core, ancillary or incidental activities of the client’s business and whether the services are provided before, during or after business hours. This was confirmed in 2 recent Supreme Court decisions, Bayton Cleaning[23] and Securecorp[24] (see Paragraph 4(e) above).
d) Working in and for the conduct of the client’s business requires the relationship between the worker and client to be an employee-employer relationship
Working in the same way, or much the same way as an employee does not require an employer-employee relationship between the worker and the employment agent’s client. This was confirmed by Justice White in UNSW Global[25] where he stated:
“Whether the worker is to be characterised as an employee or a contractor, the employment agency contract provisions were intended to apply to cases where the employment agent provided individuals who would comprise, or who would be added to, the workforce of the client for the conduct of the client’s business.”
Justice White’s statement has been confirmed and applied in subsequent Supreme Court decisions of HRC Hotel Services[26]> and Bayton Cleaning[27].
e) A fixed price contract cannot be an employment agency contract
It is a mistake to believe that a contract is not an employment agency contract because it is a fixed price contract. It is necessary to focus on the manner in which the services of workers are provided to or for the client in order to form a view as to whether those services are being provided “in and for” the conduct of the client’s business.[28] For example, in the case of the contracts determined to be employment agency contracts in H R C Hotel Services,[29] the fees charged for cleaning services were initially based on the number of hours worked by contractors, but were later charged on the basis of the number of rooms cleaned.
f) The worker is working for the Agent and therefore is not working in and for the conduct of the client’s business
The courts have consistently determined that a worker procured by an employment agent for a client provides services to the agent, notwithstanding that the worker at the same time supplies services to the agent’s clients[30].
g) The employment agency contract provisions only apply to a contract with an employment agent or labour hire firm as those terms are commonly understood
An employment agency contract is defined in s.37(1) of the Act as a contract under which a person procures the services of another person for a client. The NSW Supreme Court has limited the application of the provisions to arrangements under which an agent procures the services of a service provider (or worker) to perform services in and for the conduct of the client’s business[31] where the person’s status as employee or independent contractor might be unclear. However the Court has not limited the provisions to contracts with an “employment agent” as defined in other legislation, such as the Industrial Relations Act 1991 (NSW). [32]
11. Key findings of recent NSW Supreme Court decisions
Appendix A contains summaries of the key findings in Supreme Court decisions referred to in this CPN.
More detailed case summaries are published on the Revenue NSW website.
12 .Scenarios demonstrating application of the employment agency provisions
Appendix B outlines how the employment agency provisions apply in two alternative scenarios. The first is a case which is an employment agency contract. The second is a case which is not an employment agency contract.
Footnotes
- ^ Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127 at [150] – [151].
- ^ Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127 at [115] – [120].
- ^ Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127 at paragraph 115.
- ^ H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 at [152].
- ^ UNSW Global Pty Ltd v Chief Commissioner of State Revenue) [2016] NSWSC 1852 at paras [62]-[63].
- ^ Bayton Cleaning v Chief Commissioner of State Revenue [2019] NSWSC 657 at [267].
- ^ See Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue; International Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [42].
- ^ H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 at [153]; Bayton Cleaning v Chief Commissioner of State Revenue [2019] NSWSC 657 at [100].
- ^ Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue; International Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [134].
- ^ Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue; International Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [270].
- ^ JP Property Services Pty Limited v Chief Commissioner of State Revenue [2017] NSWSC 1391 at [79].
- ^ Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [269].
- ^ Securecorp (NSW) Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 744 at [97].
- ^ Bayton Cleaning v Chief Commissioner of State Revenue [2019] NSWSC 657 (at [273].
- ^ Banfirn Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 1058 at [27].
- ^ See H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 at [181].
- ^ See Bayton Cleaning v Chief Commissioner of State Revenue [2019] NSWSC 657 at [296].
- ^ See H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 at [152] – [153].
- ^ See UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 at [65] - [68].
- ^ See Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [279] – [290].
- ^ UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 at [63].
- ^ Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [105], H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 at [152] – [153]).
- ^ Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [105],
- ^ Securecorp (NSW) Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 744 at [97]
- ^ UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 at [63]
- ^ H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 at [153].
- ^ Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [103].
- ^ Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 at [105].
- ^ H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 at [22].
- ^ Freelance Global Ltd v Chief Commissioner of State Revenue [2013] NSWSC 127 at [173]; ;Accident Compensation Commission a Odco Pty Ltd (1990) 95 ALR 641, at 65.
- ^ UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 at [62] - [65].
- ^ Freelance Global Ltd v Chief Commissioner of State Revenue [2013] NSWSC 127 at [150] [151]; UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 at [29].