80/20 Rule - Sub-Contractors / Consultants

• November 2004

The 80/20 Rule

The 80/20 Rule may deem contractors and consultants as employees for tax purposes if they earn more then 80 per cent of their income from one client. This bears on the ability of the contractor or consultant to self-assess “personal services income” – that is, income that is mainly a reward for their own effort and skill. It does not include income:

  • for supplying or selling goods (for example, from retailing, wholesaling or manufacturing)
  • generated by an income-producing asset (such as a bulldozer)
  • for granting a right to use property (for example, the copyright to a computer program), or
  • generated by a business structure (for example, an accountant working for a large accounting firm).

If personal services income is channeled through a company, partnership or trust (a personal services entity), it is still the individual’s personal services income for income tax purposes.

How the implications of the 80/20 Rule may be averted

If a contractors income is not personal services income, that is it is income which falls into the above list, the contractor will not be subject to the rule and will not be deemed as an employee.

Personal service income is reward for effort or skill. So for example an owner/driver of a semi-trailer will not produce personal income. This is because ordinary income from transporting goods is not personal services income because it is produced mainly by use of the semi-trailer, and not mainly as a reward for personal efforts or skills.

Generally for the transport industry, if the vehicle/s are a substantial business asset, purpose-built for road transport and generally not suitable for private purposes, the income from driving them would not be personal services income. This would include, for example, a semi-trailer specifically suited to the driver's business.

However if the vehicle is an ordinary passenger vehicle, used partly for private purposes, the income from driving it would be personal services income.

The 80/20 rule may also not apply if you meet what the legislation calls the “Results Test.” You meet the results test if you can answer ‘yes’ to all of the following questions in relation to your work, for at least 75% of your personal services income:

  • Under your contract or arrangement, is the personal services income paid to achieve a specified result or outcome?
    You meet this first condition, for example, if you deliver goods and are paid for each individual delivery.
  • Do you have to provide the tools or equipment necessary (if any) to do your work?
    You meet this second condition, for example, if you provide your own vehicle.
  • Are you liable for rectifying defects in your work?
    This condition essentially focuses on whether you are liable to cover the cost of rectifying defects in your work or for any damages arising from your work. This may include doing the rectification work yourself at your own cost or paying for someone else to fix the work.

Common Law

The common law relating to whether a person is an employee or contractor was clarified by the High Court in Hollis v Vabu Pty Ltd in the context of vicarious liability for the negligence of a bicycle courier.

The Court found that the decisive factors of an employment relationship included:

  • The level of control that one person has over another with respect to how the latter will perform relevant services (the ‘control test’);
  • The manner of remuneration;
  • The provision of equipment and tools of trade;
  • The hours of service;
  • The provision of leave;
  • How the services are represented to the public or other parties (in this case, the courier wore a shirt bearing the logo of the company)

In this case, the Court found that the bicycle couriers were employees because:

  • The couriers did not have independence in the conduct of their operations;
  • The couriers had little control over the manner of performing their work;
  • The company produced pay summaries every week for the couriers;
  • The company was able to stipulate when annual leave was to be restricted

This was despite the fact that the couriers owned their own bicycles, bore the expenses of running them and supplied their own accessories. The Court also paid little attention to the fact that the couriers were ‘contractors’ on paper.

Workers Compensation

Generally, employers must have a workers compensation policy to cover all their workers and ‘deemed workers’. Employment status in this area is also not exhaustively defined by the tax provisions and the 80/20 rule is thus very limited in operation.

A ‘worker’ is a person who has entered into, or works under, a contract of service or apprenticeship with an employer (whether by way of manual labour, clerical work or otherwise, and whether the contract is expressed or implied, and whether the contract is oral or in writing).

Furthermore, people working as contractors may be ‘deemed workers’ even though they would not be classified as employees for tax purposes. Some of the factors that will be taken into account to determine ‘deemed worker’ status include:

  • Whether the arrangement is in writing;
  • Whether the contractor can employ other people to perform the work;
  • Whether he contractor works at stated hours on usual days and the contract specifies the hours and/or days;
  • Whether the contractor measures and inspects the site and provides a fixed price quotation inclusive of labour and material;
  • Whether the contractor deals directly with the client requesting the work or the principal contractor for whose benefit the work is to be done;
  • Whether the contractor can make a profit or loss over the market rate for a tradesman working in the industry;
  • Whether the contractor supplies the materials, machinery and equipment used in completion of the job; and
  • Whether the contractor could be liable for bad work.

From 1 July 2003, a principal contractor (that is, anyone who enters into a contract with another person to carry out work that is an aspect of, or connected to, their business) needs to ensure that their subcontractors have taken out workers compensation policies for their workers and have paid all premiums associated with that work. Principal contractors must also ensure that subcontractors:

  • Are classified in the correct industry;
  • Have declared an appropriate amount of wages for their insurance cover; and
  • Have signed a statement that there are no outstanding liabilities and that all workers compensation premiums applicable for that work have been paid.

If these checks are not undertaken, the principal may be liable for the subcontractor’s unpaid workers compensation premiums.

To avoid liability, the principal contractor must have:

  1. A copy of the subcontractor’s Certificate of Currency; and
  2. A written statement by the subcontractor that all workers compensation premiums applicable to the work have been paid.

The upshot of these requirements is that a principal contractor is entitled to withhold payment from the subcontractor until these documents are provided. Note that the principal may still be liable for unpaid workers compensation premiums if they believed that the subcontractor’s statement was false.

Finally, sole traders or partnerships without workers need only declare their status as such to principal contractors. They are not required to have workers compensation insurance

Our legal expertise in this area is underscored by our strong industry awareness and experience, which gives our clients the benefit of accurate, detailed and up-to-date professional advice. Should you have any queries or concerns relating to current obligations or upcoming reforms, please do not hesitate to contact us.

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued, or any information herein relied upon.