Background – what’s the issue?
Engaging employees can be frustrating for all types of businesses and industries. To engage an employee, it often involves most of the following steps (amongst others):
- interpreting employment awards and government legislation;
- tracking and paying annual leave, sick leave and long service leave;
- paying worker’s compensation insurance, payroll tax, and superannuation;
- calculating and withholding PAYG Withholding and submitting it to the ATO; and
- ensuring you do not fall foul of unfair dismissal laws.
For as long as there have been employees, businesses have tried to find ways to classify them as anything but employees. In the past it was common for businesses to “fire on Friday, hire on Monday”, that is, fire the employee and immediately re-hire them as a “contractor”. This was especially common in the IT and construction industries.
The employee would no longer have super paid on their behalf, tax withheld from payments, annual leave or sick leave, but the employer would usually pay them a few extra dollars per hour as an incentive to move to be a contractor. The employee was happy, and the employer would have less paperwork to deal with, and probably be saving some money as well by not having to pay super, leave or payroll tax.
The government was concerned about this because of the potential for employee’s missing out on their entitlements, as well as the potential for former employees to increase their tax deductions by arranging their affairs as a “business” rather than as an employee. So over time government legislation and the courts have made this type of arrangement more difficult to do. Every year there is new legislation or new cases which move the goalposts a little. Essentially the changes are trying to make sure that if you were not a genuinely independent contractor, but rather the working relationship was one where you had all the characteristics of being an employee but you simply called yourself a “contractor”, then you would be treated the same as an employee.
Who is an employee? Who is an independent contractor?
Over the years, court cases have provided guidelines on how to determine whether someone is a genuine independent contractor, or whether they should be classified as an employee. In the case of Hollis v Vabu Pty Ltd, it was held that:
“the distinction between an employee and an independent contractor is rooted fundamentally in the difference between a person who serves his… employer’s business, and a person who carries on a trade or business of his own.”
To put it another way, employees are intrinsically connected to their employer’s business, whereas independent contractors work for a variety of clients and other businesses. Although the courts take into consideration the paperwork between the individual and the business, they indicate that just because the paperwork says someone is a “contractor”, this alone is not sufficient to prove someone is not an employee. What happens in practice is important as well.
The courts have also mentioned that, in deciding between whom is an employee and who is an independent contractor, there is not one simple factor to determine this. The have provided a list of several indicia that, if most or all are present in a working relationship, will strongly indicate that it is one of employer-employee. Here is a list (adapted from the case Jiang Shen Cai trading as French Accent v Do Rozario) of most of those indicia that would point towards someone more likely to be an employee:
- Employer exercises control over the way the work is performed, the location and hours of work
- Employer advertises the goods or services of the business
- Employer provides and maintains significant tools or equipment
- Employer can determine what work can be delegated or sub-contracted out and to whom
- Employer provides uniform or business cards
- The employee is paid periodic wage or salary
- Employer provides paid holidays or sick leave to employees
- The work does not involve a profession, trade or distinct calling on the part of the employee
- The employee does not spend a significant portion of their pay on business expenses
Payroll Tax Issues
If an individual can pass the threshold and be regarded as an independent contractor rather than an employee, this will absolve the business that engages them from having to worry about PAYG Withholding, paying leave entitlements, and paying superannuation. One area where there can still be an issue is payroll tax. Payroll tax is a state-based tax and the legislation will vary a bit from state-to-state, but the states do work together to try and harmonise as much as possible.
Generally speaking, even if you are an independent contractor and you work for another business you can still be caught in the payroll tax net. Usually this is where the arrangement between the independent contractor and business is regarded as a “relevant contract.” In most states, a “relevant contract” is defined along the lines of a contract that involves the provision of a service (as opposed to provision of goods). For example, a landscaper is engaged by a business to carry out some landscaping of their yard. This is a service. If the business engaged an office supplies company to sell them a laptop, this is not a contract for service, but rather a contract for goods.
As you can imagine, this brings into the payroll tax net a lot of people. Although the payroll tax rules will then usually provide a list of exceptions. For example in Queensland (and there are similar provisions in other states), there are 9 exceptions, including if you provide services for no more than 90 days in a financial year (for example, the landscaper does their work in the business’s yard for 30 days and then they finish – this would be exempt); and if the services are not usually required by your business and the independent contractor derives less than 40% of their gross income from your business. If you look at these rules, someone that could be regarded as an independent contractor who is captured by payroll tax could be a doctor (GP) that is engaged by a practice to work at the practice temporarily for 6 months (about 120 working days) to fill in for another doctor and is paid an hourly amount.
You should also note that each state has a payroll tax threshold, which if their wages (or amounts deemed to be wages) are above this threshold, they would have to start paying payroll tax. For example, in Queensland this threshold is $1.3 million. So, businesses with very few employees or individuals engaged may not have to pay payroll tax at all.
General Practitioners (and some other specialists)
For a long time the general understanding and industry standard has been that GPs working in private practice are not employees. It was understood that each GP was running their own medical practice, billing their own patients and paying a fee to the host practice to cover common expenses e.g. rent, reception staff, electricity etc.
The host practice would collect the cash payable to the GP, deduct the agreed management fee (plus 10% GST) and transfers the balance to the GP.
The individual doctor would then pay for their own professional indemnity insurance, medical registration, and training costs. The practice would not be responsible for the tax or superannuation of the individual doctor and would also not be expected to pay payroll tax on the gross billings (less management fees) transferred to the doctor. A GP that is not an employee or an independent contractor – rather that could be better described as an independent associate. On this basis they generally have not been caught under the definition of payroll tax in the past, although recent court cases have led to people questioning the above generally accepted treatment.
Note: If not engaged as an independent associate in the way described above, and instead, for example, engaged by the practice for an hourly rate over a long period of time, there has always been potential issues for the practice in having the doctor counted as an employee or eligible independent contractor for payroll tax purposes, and maybe for superannuation or other purposes as well.
Recent case involving payroll tax
The 2019 case of Commissioner of State Revenue v The Optical Superstore Pty Ltd involved payroll tax in Victoria, but courts and revenue offices always look to decisions in other states for guidance, so this is relevant to persons in all states. It involved a common arrangement used in the optometry industry – the practice collects fees from patients, deducts a management fee and pays the balance to the optometrist – sound familiar?
In the view of the Victorian Office of State Revenue (VOSR) and the Victoria Court of Appeal, the payments by the practice to the optometrist were subject to payroll tax. The arrangement can best be described as follows:
- Optometrist treated patients at store. The fees were put into practice bank account. Each month the practice paid the optometrist a “reimbursement amount” based on hours worked by the optometrist (as per timesheet signed off by store manager).
- An occupancy fee was deducted from each optometrist’s payment equal to their patient fees less the “reimbursement amount”.
- If the patient fees were less than the reimbursement amount, the difference was treated as a “location attendance premium” paid to the optometrist with GST on top and an RCTI issued.
So, if you look at the arrangement more closely, the “Optical Superstore” case is different from most GP practices:
- The amount paid to the optometrist was based on the hours they worked, so essentially, they were being paid like an employee is paid (refer to indicia of employment as previously mentioned). They even had a timesheet signed off by a store manager.
- Then there was the “location attendance premium” which would itself usually fall under payroll tax obligations, as the practice is paying the optometrist and not the other way around.
- They were recognised as contractors, not employees, but it was a “relevant contract” so fell into payroll tax arena, and as ‘The Optical Superstore’ had many locations they were all grouped together and easily went over the relevant thresholds for payroll tax.
The case is mostly worrisome because the revenue authority and the courts adopted a broad definition of what is a “relevant contract”.
What can you do?
If you own a medical, dental or allied health practice, you should consider the following steps to make it clear you are engaging doctors as independent associates who are paying the practice for services (and not the other way around):
- Engage a lawyer to draft an agreement that makes it clear the practice is providing services to the doctor (and not the other way around) g. a “services and facilities agreement” or “associateship agreement” not an employment agreement or contractor agreement.
- Your financial statements and accounts, and what you do in practice, must reflect the legal agreement e.g. do not show the doctor’s billings as income of the practice, rather just show the management/service fee they pay as income of the practice.
- Do not refer to the doctors as “employees” or even “contractors” – better terms would be “doctors” or “independent associates”.
- Avoid the indicia of employment e.g. avoid paying a ‘guaranteed amount’ in the event they generate low fees; and letting the doctor have autonomy in setting their hours and taking leave (of course they should liaise with the practice to pre-plan rosters to confirm availability and ensure patient care).
Please note the above information is general in nature, and you should discuss how it applies to your situation with your accountant and/or lawyer.