Hidden Dangers of Mis-Classifying Contractors in Your Medical Practice
Since this blog was written in 2018, there have been developments. This blog has the latest information regarding payroll tax and independent medical contractors.
Having employees is one of the highest costs incurred by any business, and that also presents one of the most significant risks, and medical practices are no exception. Contractors, on the other hand, are flexible, often highly specialised, and absorb their own risks, making them an attractive solution for managing staffing requirements. But before you place your “Help Wanted” ad, you should be aware of the legal differences between an employee and a contractor – and the consequences of getting the classification wrong.
Five Ways to distinguish a contractor from an employee:
1. Is the contractor able to control their own hours and when they work?
Independent contractors have control over how many hours and what hours they work. If you dictate to your contractor when, where and how they perform their work, you may, in fact, be positioning yourself as an employer. If, for example, you engaged another medical practitioner to attend your practice and see your patients according to your appointment schedule, this could potentially be a difficult test to overcome. On its own, however, it is not a defining point, and the whole relationship must be considered.
2. Who is supplying the equipment required to do the job?
Contractors must provide their own equipment. In some circumstances, such as where that equipment is expensive or specialised medical equipment, it may be necessary to share resources, so your contractors can undertake the work required. As a general rule, however, it is important that contractors are responsible for providing their own tools, including computers and other materials required by them to complete their contract.
3. Who is taking on the risk and is liable for insurance coverage?
All self-employed practitioners should hold their own professional indemnity insurance, but caution should still be exercised. If a contractor’s agreement assigns risk to an employer for work performed by a contractor, it may indicate an employer/employee relationship. If your contractor is a medical practitioner, your contract should contain a warranty that they will always hold sufficient and valid professional indemnity insurance.
4. Is the contractor able to delegate their duties?
Delegation is another tricky one for medical practices, and it is not difficult to see why. You invest time in ensuring you engage the right practitioner for your practice. Someone with the right experience and skills, and you don’t particularly want that person to delegate their role under the contract to one of their own employees, particularly if that practitioner does not possess the experience or skills you might expect. It is wise to note, however, that a prohibition on delegation can be interpreted as an indicator of an employment relationship.
5. How is payment determined, and who is responsible for tax and superannuation?
Contractors can set their own fees and are usually paid for results (for example, the number of hours worked) as set out in the contract. They are responsible for their personal tax obligations and do not receive sick or holiday allowances. Contractors are also required to make their individual superannuation contributions. It’s important to note no single element on its own will result in the determination of the working relationship. Instead, the entire contract will be considered, including whether the contractor had any particular disadvantages, the value of the contract and whether it reflects market value, how long the contract is for and how the arrangement would or could be terminated.
What are the consequences of getting it wrong?
There are various laws at play around correctly classifying your employees. Below are some of the examples where medical practices could become "unstuck" if they were to misclassify an employee:
Fair Work Act
Unfortunately, contractor relationships are sometimes used by employers to avoid their obligations. If the Fair Work Ombudsman finds that you are intentionally avoiding your obligations, misleading, or otherwise acting dishonestly by directing employees to undertake work as contractors, you can be fined up to $54,000 per contract.
Australian Tax Office (ATO)
The ATO can determine that your contractors are, in fact, employees for tax purposes. If this is the case, you will be liable to pay their entire Pay As You Go (PAYG) withholding tax for the period of their employment. If there is dishonesty or elements of intentional avoidance, the ATO may impose additional fines and penalties. Importantly, the Australian Taxation Legislation triggers personal liability for Directors who are responsible for meeting PAYG obligations.
Superannuation
Classifying employees as contractors has even greater consequences under the superannuation legislation. You will be immediately liable for all unpaid superannuation, calculated at 9.5% of your income, plus interest at 10%, an administration fee, and an additional Superannuation Guarantee of up to 200%. Contrary to popular belief, engaging a contractor does not automatically relieve you of the obligation to pay superannuation. Under the Superannuation Guarantee scheme, if you pay a contractor for their labour more than $450 per month in any quarter, you may be required to pay superannuation. The superannuation guarantee applies across many industries and positions, from cleaners to company directors and medical practitioners. If you engage contractors in any capacity, it is essential you check your superannuation obligations for each contract and review them regularly.
What Next?
If you are unsure whether your contractor is in fact, an employee, or you need some help drafting your contractor agreements, please feel free to contact us to schedule a one-on-one consultation. We always welcome new members to the You Legal for Doctors Facebook Group – click here to join as a member.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.