With the rise of the gig economy, correctly working out whether you are hiring an employee or simply engaging an independent contractor has never been more important. As a recent court ruling shows, getting it wrong can be costly,
New payroll tax ruling for medical contractors
A medical practice in the Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue has partially won a Payroll Tax exemption at considerable cost to defend after it was alleged it’s doctors were contractors and not employees. The Australian Medical Association (‘AMA’) has issued a warning for practices to update their documentation in order to avoid a costly audit and penalties. A ‘gentlemen’s handshake’ is no longer an option in this new digital environment.
We have provided practices a payroll tax checklist below and an update on what you need to consider. If you require the right tested systems and legally, commercially-prepared templates contact us for more information confidentially for a free practice assessment.
A Perth accommodation business was recently fined $60,000 after the High Court upheld an appeal by the Fair Work Ombudsman. It was alleged the company had contravened the sham arrangement provisions of workplace laws when it purported to convert three employees into contractors.
These are not isolated cases. Employers need to ensure their working arrangements are correct, as some industries are seeing a rise in claims by former contractors seeking compensation for not being paid their full entitlements as an ‘employee’.
What’s the distinction?
Deciding if someone is an employee or a contractor is not always straightforward, but there is a key difference between an employee who works in the business and is part of it in comparison to independent contractors and subcontractors who run their own businesses and are only supplying a service. They can choose their own hours of work and must pay for their own insurance, sick-leave, holidays and super contributions.
The ideal arrangement is a tenant provider arrangement. The provider is the tenant, the practice is the landlord. There is a valid service agreement stipulating the relationship is to provide facilities and support services to the provider including the billing and collection of monies in trust for the provider. A separate clearing or billings trust account is in place with clear accounting and financial reporting trails see our unique Doctors Pay (Service Fee Calculator). The medical receptionist and the provider should not be paid from the same bank account nor should they appear in the same MYOB, Xero or QuickBooks ledger where the practice BAS is prepared from.
Before bringing any new worker or contractor on-board, always check whether the working arrangement is legally deemed to be employment or a contract. To help you decide, For medical and health practices this employee or contractor or tenant provider tool that addresses ATO, payroll tax, Medicare Sham Debt Recovery and excessive Pathology Rent may also be useful to look at.
some myths about contractors
There are many misconceptions about hiring an independent contractor, according to the ATO.
Having an Australian Business Number (ABN) or a registered business name
A common myth is that this automatically makes a person a contractor. In fact, having an ABN or being paid after submitting an invoice makes no difference to whether an employment arrangement is a contract or employment.
The length of a job
Another widespread myth is that the length or regularity of a job determines whether someone is an employee or a contractor. Both employees and contractors can be used for casual, temporary, on-call or infrequent work.
The percentage of annual income paid
Businesses sometimes think if they pay less than 80 percent of an employee’s annual income they’re not their employer. This so-called ’80 percent rule’ is only relevant for the ATO’s assessment of personal services income (PSI) and whether or not a contractor can claim business tax deductions. If you have a tenant and landlord relationship i.e. using a service agreement for practice management facilities and support, this should not be an issue as each patient is a customer and not the practice, so this rule may not apply.
Legally, it’s not a matter of choice, as employment status is determined by the working arrangement and specific terms and conditions of the job.
Signing a work contract stating an individual is a contractor does not override the true employment relationship and relevant legislation. It also doesn’t remove Pay-As-You-Go tax withholding and super obligations.
Dangers of ‘sham contracting’
Sham contracts are usually offered by employers trying to disguise an employment relationship as a contract to avoid paying the required employee entitlements.
Both the ATO and Fair Work Ombudsman can impose significant penalties if they determine the worker is an employee. Businesses also run the risk that they will have to foot the bill for back-pay to cover the employee’s unpaid leave and employment entitlements.
Protecting your employment rights
It’s also in the interests of employees and individual contractors to check their work status is correct. Otherwise, they risk missing out on significant financial benefits and the employment protections they are entitled to.
Under current legislation it’s illegal for employers to misrepresent a current or proposed employment relationship as an independent contracting arrangement, or to dismiss or threaten to dismiss an employee so they can be re-hired as a contractor. It’s also illegal to make misleading statements to an employee to try to persuade them to take on a contract arrangement for similar work they performed as an employee.
Employees and contractors can request assistance from the Fair Work Ombudsman if they believe their rights have been breached.
Call us if you would like to discuss your employment status, or to check whether you are meeting all your new Medicare billing rules, tax and superannuation obligations for someone who works for you.
For more information:
2019 AMA Payroll Tax Warning – Update your documentation
2018 Historic Doctors/Providers Payroll Tax Warning! – Practice Checklist!