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Employment Agency Provisions: Independent Contractors or Employees?

Security and Cleaning Companies Impacted by Employment Agency Provisions

Payroll Tax – How The Employment Agency Provisions Impact on Cleaning and Security Service Companies

Background

The Employment Agency provisions of the Payroll Tax Act were introduced in 2008 as part of the harmonisation of the payroll tax laws of Queensland, New South Wales and Victoria.

The Employment Agency provisions are intended to apply where an agent (for the purpose of this article let’s say a cleaning or security service company) procures for a client the services of a worker (“a contractor”) to perform employee-like functions and the contractor does not become an employee of either the cleaning or security service company or the client. In such cases, the cleaning or security service company is deemed to be the contractor’s employer and the cleaning or security service company becomes liable for payroll tax.

Most cleaning and security service companies engage independent contractors to assist them in their work. The independent contractors help the companies to fulfil their obligations to provide cleaners or security personnel to their clients, such as large hotels, retail outlets, construction companies, stadiums, government departments and other organisations.

Common misunderstandings of the Payroll Tax Act for cleaning or security service companies

In my experience, most cleaning and security service companies believe that if they engage independent contractors, then the contractor provisions under the Payroll Tax Act will apply. More importantly, they will be able to rely on one of the exemptions under the contractor provisions. For example, where a cleaning or security service company engages another large company to supply cleaners or security personnel, they believe they won’t be liable for payroll tax. Unfortunately, that may no longer be the case.

Employment agency and contractor provisions are mutually exclusive

If you are deemed to be an ‘employment agent’ you cannot rely on any of the exemptions under the contractor provisions even though you have engaged independent contractors who would otherwise be exempt under the contractor provisions.

Chain of hire

It is not uncommon where one company on-hires a worker to another company who in turn on-hires the worker to its client.

This arrangement could expose the two companies to payroll tax on essentially the same employment agency arrangement.

To overcome this situation, the Office of State Revenue would usually only issue a payroll tax assessment against the company closest to the ultimate client. See for example: https://www.sro.vic.gov.au/legislation/employment-agency-contracts-chain-hire

There are similar public rulings in Queensland and New South Wales.

Recent Supreme Court decisions

The Office of State Revenue in each state relies upon a number of recent Supreme Court decisions relating to the interpretation of the employment agency provisions:

  • Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127
  • UNSW Global P/L v Chief Commissioner of State Revenue [2016] NSWSC 1852
  • HRC Hotel Services Pty Ltd V Chief Commissioner of State Revenue [2018] NSWSC 820
  • Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue (NSW); International Hotel Services Pty Ltd v Chief Commissioner of State Revenue 2019 ATC ¶20-696

Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue (NSW)

In Bayton the taxpayer entered into contracts to provide cleaning services predominantly for hotels. The services included workers sourced through other companies.

The relevant facts in this case were:

  1. The cleaning staff performed the cleaning work on-site at the clients’ premises;
  2. The cleaning staff worked in the ordinary conduct of the clients’ businesses; and
  3. The work would otherwise necessarily have been done by the clients’ own employees.

The Court held that the arrangements were employment agency contracts within the meaning of s37(1) of the NSW Payroll Tax Act. A similar provision applies to both Queensland and Victoria.

Essentially, the cleaners formed an addition to the clients’ workforce and provided those services in much the same way as the clients’ staff would otherwise have done had the services not been outsourced.

This was the same test as the Supreme Court earlier applied in HRC Hotel Services Pty Ltd v Chief Commissioner of State Revenue mentioned above.

JP Property Services Pty Ltd v Chief Commissioner of State Revenue

However, an earlier case also decided by the Supreme Court of NSW, JP Property Services Pty Ltd v Chief Commissioner of State Revenue 2017 ATC 20-634; [2017] NSWSC 1391 is also relevant.

JP Property Services also involved a cleaning company. In this case it was held that the employment agency provisions did not apply. The critical question was whether or not the individuals subcontracted by the taxpayer comprised, or were added to, the workforce of the taxpayer’s clients for the conduct of the client’s business. As it is put in the Headnote to the ATR Report (the “client” is a supermarket owner):

“3. None of the three types of contracts were employment agency contracts … because the services of the contracts were not ‘for a client of the employment agent’ in the requisite sense because they were not provided by subcontractors working in the client’s business. The services provided by the subcontractors were out of hours cleaning services incidental to … the … clients’ businesses.”

The facts of each case will determine whether a cleaning or security service company will be liable for payroll tax under the employment agency provisions of the Payroll Tax Act and one must consider each case on its own merits.

Employment agency provisions and contractor provisions

There are very few exemptions under the employment agency provisions for a taxpayer to rely upon to escape liability for payroll tax. See for example the QLD OSR Public Ruling https://www.treasury.qld.gov.au/resource/pta026/. There are similar Public Rulings for New South Wales and Victoria.

Under the contractor provisions there are a greater number of exemptions that can be relied upon by the taxpayer. If your business is found to be an “employment agent” under the Payroll Tax Act then there are very few exemptions available to you.

Legal advice for cleaning and security service companies

We have many years of experience in advising businesses on payroll tax. For further information contact Tobin Partners by email or call Peter Tobin directly on 0438 001 809.

Article by Peter Tobin, Tobin Partners Lawyers

Disclaimer

This article contains general information only. It should not be relied upon as legal advice. Formal legal advice should be sought on particular matters canvassed.

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