Claire Forshaw from Power Pays explains the importance of knowing when your medical contractor becomes an employee and understanding how it affects your payroll tax and super obligations – and the penalties and charges that may apply if you get it wrong.
Nine in ten Australian businesses are considered ‘small’ yet contribute one third of Australia’s GDP – and 61 per cent of those small businesses are operated by sole traders. We in the medical community are an important part of that make-up – yet in many instances, independent medical contractors are in fact deemed ‘employees’ when it comes to ATO regulations and legal compliance.
Do you know when your medical contractor becomes an employee?
If you’re a practice or clinic owner engaging a medical contractor operating via an ABN some or all of the time, knowing this this delineation is important because it affects your payroll tax and super obligations – and penalties and charges may apply if you get it wrong.
The ATO use the following six factors to determine whether a worker is an employee or independent contractor for super purposes:
- Their ability to subcontract or delegate
- The basis of payment
- Their equipment, tools and other assets
- Any commercial risks
- The worker’s control over the work
If you engage a sole trader or a locum for even just one hour a year – it’s important to read this. This applies to full-time hospital HMOs, interns, residents and registrars undertaking additional locum work; full-time hospital doctors about to specialise and doing locum work; returning fellows working full-time in a hospital and doing locum work; full-time lifestyle locums and private practice doctors invoicing under an ABN.
The ATO’s employee/contractor decision tool is a helpful starting point to ascertain whether your worker many be an employee or contractor for tax and super purposes but it’s also good to speak to a professional advisor to navigate the complexities.
Broadly speaking there are two key areas to be aware of when it comes to the employer versus contractor debate:
- You may have to pay super for your medical sole trader if their contract is principally for their labour This is typically the case for this type of work because the ATO deem this type of worker as an ‘employee’ for the super guarantee that all Australian employees are entitled too. This also means practices and clinics should also include these people for payroll tax reporting.
To ascertain if the contractor is an ‘employee’ for super guarantee purposes, speak to a professional advisor, but if they are working wholly under a contract for their personal labour and skills and they are not paid to achieve a result (a specific outcome) nor employing their own means to accomplish that result (i.e. provision of labour, plant and equipment or results-driven payment) then it’s most likely a yes and they will be considered an ‘employee’ and they are entitled to be paid super by you.
- A case of negligence – practices and clinics can be prosecuted for vicarious liability
Liability is part and parcel of our profession and while laws relating to medical negligence vary between states and territories, generally Australian law allows a person to claim for compensation if they have suffered physical, psychological or financial harm as a result of negligent medical treatment. And for independent contractors consulting to a private practice as a locum – it’s not black and white either.
‘Vicarious liability’ is a legal term that put simply means that one person is held responsible for another's actions. So, in this case, an employer (clinic or practice) will generally be vicariously liable for a civil wrong that causes someone else to suffer loss or harm resulting in legal liability committed by their employees acting in the course of their employment. For example, a medical error that is judged to be the fault of your locum could see your practice or clinic prosecuted under vicarious liability.
Let’s put these into a real-life scenario with a legal case from the courier industry
Courier companies engage lots of independent contractors too. In this example we highlight the case of James who is a bicycle courier. He operates as an independent contractor via an ABN as sole trader. He contracts to Vabu Pty Ltd t/as Crisis Couriers (Vabu). James is:
- remunerated for his personal labour
- has no right of delegation
- is not paid to achieve a result.
This deems him an employee for both super and vicarious liability purposes. Vabu must pay James the super guarantee and include him in their payroll tax reporting.
In the course of his duties for Vabu one day and identifiable by his uniform, James caused negligent injury to Hollis who prosecuted Vabu for those injuries sustained. In this case, the relationship between Vabu and the James is that of ‘employer’ and ‘employee’ therefore Vabu was considered vicariously liable for the consequences of James’s negligent performance of his work.
Remove some of the risk and headache – consider a medical contractor payroll solution
After years of advocacy among members of the small business community, in late-2016, Australian Consumer Law was extended to protect small businesses with fewer than 20 employees from unfair contract terms and that includes independent contractors.
There’s a lot to keep abreast of when you’re self-employed let alone the advances in the medical profession, that’s why, if you’re engaging in private practice or a locum, consider a medical contractor engagement structure. Your medical sole traders can be paid (including tax and entitlements) through a third-party payroll, eliminating their BAS, tax and paperwork headaches.
This solution also provides them access to super (automatically covering your responsibility there) and Work Cover and ensures your practice or clinic doesn’t have to worry about all that extra paperwork or compliance.
In a medical contractor payroll model, doctors also get more money in their hand. And there is now no risk to the medical practice or clinic any more. You will simply receive an invoice from the supplier and know that everything else is covered for the doctor.
It’s really important to understand your classification but speak to a professional advisor to ensure you understand where you fit, get the right entitlements and are compliant in every aspect.
Claire Forshaw is authorised as a credit representative (Credit Representative number 483826) to engage in credit activities on behalf of BLSSA Pty Ltd (ACN 117 651 760) (Australian Credit Licence number 391237).
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Understand your entitlements or obligations
As a contractor, it’s important to understand your entitlements and as a practice or clinic owner it’s important to know your obligations – this is where a professional advisor can assist. Claire Forshaw is the National Client Manager for Power Pays, which provides contractor management for the IT and medical industries. Power Pays can help tailor your professional, or individual finance framework via a holistic service combining salary packaging, tax and accounting, home and investment loans, and novated teasing tailored to your individual needs, all underpinned by simple, flexible, compliant, and cost-effective support. If you would like to know more, please contact us for an introduction to Claire Forshaw.