Practice Managers: Why now is a great time to review your agreements with independent doctors
Often medical practices hire doctors as independent practitioners because it is thought to be more flexible, for both the practice and the doctor. However, with ongoing changes to the law around independent contractors and tenant doctors, an independent practitioner can in many cases be considered an employee.
Getting this wrong has serious (and expensive) consequences for a medical practice including potential liability for sham contracting and payment of superannuation and other entitlements, and possible payroll tax consequences as well.
Below, we unpack why it is critical that your medical practice review your independent practitioner agreements now to best protect your practice.
What does an independent practitioner arrangement look like?
Doctors are frequently engaged by a medical practice as either an employee or an independent practitioner.
Where a practice hires the doctor as an employee, generally:
the doctor enters into an employment agreement;
the doctor works set hours;
the doctor is paid an agreed salary or hourly rate (often with a top up based on their billings);
the doctor is entitled to be paid personal (sick leave) and annual leave by the practice;
the practice pays superannuation for the doctor;
the medical practice provides all of the equipment and staff for the doctor to conduct their practice; and
the medical practice bills patients and Medicare direct, collecting the consult fees.
Alternatively, where a practice hires a doctor as an independent practitioner, typically the arrangement includes a combination of some or all of the following:
the doctor enters into either an independent contractor agreement, service agreement or tenancy arrangement (these terms are often used interchangeably by doctors and medical practices);
the doctor sets up their own entity with an ABN (and commonly a Pty Ltd company);
the doctor bills the patients and Medicare and collects the fees;
the doctor provides their “doctor’s bag”, computer and other equipment needed to conduct their role;
the doctor pays the practice a percentage or amount of those billings (often monthly, fortnightly or weekly, depending on the arrangement); and
the doctor is responsible for their own tax, leave entitlements and superannuation.
Why is a review required?
On 26 August 2024, the Fair Work Act introduced a new relationship test for constitutionally covered businesses. A constitutionally covered business is usually a company business with either “Pty Ltd” or “Ltd” in its name.
The relationship test signifies a big change to the laws surrounding independent contractor arrangements and as such, it is important to revisit all your existing arrangements and consider new arrangements.
The relationship test is split into two parts for a constitutionally covered business:
Where the contractor relationship was started before 26 August 2024, the “start of relationship” test applies; and
Where the contractor relationship was started after 26 August 2024, the “whole of relationship” test applies.
The relationship test must consider each case on its specific facts and is applied by first determining whether the start of relationship or whole of relationship test applies, depending on the contract start date.
The start of relationship test focuses on what the parties have agreed, generally by reference to the terms of the contract. In contrast, the whole of relationship test considers the ‘real substance, practical reality and true nature’ of the relationship. This therefore includes the contract, but also how the relationship is actually functioning.
Under both tests, the factors to be considered include but aren’t limited to:
The amount of control a medical practice has over work.
Which party bears financial responsibility and risk.
Which party supplies tools and equipment.
Whether the independent doctor can subcontract work.
Who sets the hours of work; and
Whether there is an expectation of continuing work.
For example, the contract may give a doctor full control over how and when they perform their work but in reality, the practice may exercise significant control (e.g. requiring the doctor to comply with practice policies or attend team meetings, or restricting their right to delegate). The whole of relationship test would assess this very holistically, taking into account both the contract and the performance of it. In contrast, the start of relationship test would look at what the parties agreed. Therefore, changes in the work performed (without accompanying changes to the contract) won’t ordinarily be relevant to determine whether that doctor is a contractor or employee.
However, using either test can present difficulties for practices and therefore we recommend seeking legal advice to help determine whether your workers are true employees or contractors.
Can an independent practitioner opt out of the whole of relationship test?
Importantly, an independent practitioner can opt out of the whole relationship test and use the start of relationship test, but only if they earn more than the high-income threshold, As at 1 July 2024, the high income threshold was set at $175,000.
If an independent practitioner meets the high income threshold and opts out of the whole of relationship test, it is necessary to follow the correct procedures to ensure the opt out has been done correctly.
This procedure includes the independent practitioner providing the practice with a notice that they believe their earnings for work performed under the relationship are more than the high income threshold at the time the notice is provided. It is important this notice be in the correct form and compliant with the Fair Work Act.
What to review
Given the high proportion of independent practitioners working in medical practices, we strongly suggest that all independent contractor agreements and/or service agreements and/or tenancy arrangements be reviewed by your practice.
It is important to note that what started as an independent practitioner arrangement could have changed over time in practice and therefore needs to be re-assessed to ensure that what is occurring in practice, is reflected in the contract (and visa versa).
Similarly, the high income threshold could apply and the parties could decide whether the practitioner will opt out, but this procedure needs to be formally implemented to be effective.
Does your medical practice need to pay your independent practitioners superannuation?
Even if you use the correct relationship test to assess whether your independent practitioners are contractors or employees, your medical practice may also be running the risk of being exposed for superannuation guarantee purposes. If your practice pays practitioners mainly for their labour, as may be the case, you may need to pay their superannuation as if they are an employee. This is dependent on a number of factors including whether your independent practitioners are operating as a constitutionally covered business or a sole trader.
Payroll Tax
Another common misconception is that payroll tax is only payable on payments to employees. New case law, revenue rulings, government announcements and new legislation, has made it more likely that payments to contractors will be considered taxable for payroll tax purposes. We discuss the current state of play (which varies in each state and territory) in our Payroll Tax Pulse Check article. If you are interested in learning about the nuances of the test, and how this differs from general employee or superannuation tests, we explore this in another article here.
Minimising risk going forward: what you can do
The law surrounding independent practitioners and their engagement by a medical practice is complex and there is no one size fits all approach. Some of the practitioners in your practice could be deemed employees while others may be considered independent contractors or independent business owners operating from your premises, therefore it is important to get the right advice. We recommend continuing to review your agreements when changes in the law occur and implement the correct agreements and procedures for both independent and employee practitioners.
Our team has extensive experience in providing advice and insights into best practices for independent practitioner engagement. To discuss how we can assist you and your practice, contact our team here, and we will put you in touch with the best professional for your needs.