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Ruling

Subject: status of work - employee versus contractor

Question

Does the arrangement you currently have in place with a doctor constitute an employer/employee relationship, rather than that of principal/independent contractor?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You run a private general medical practice.

You currently employ a doctor to work at your medical practice. The doctor is currently treated as an employee. The practice has paid payroll tax, pay as you go (PAYG) withholding tax and superannuation for the doctor.

The doctor has worked at the practice for several years.

You state the following details regarding the working relationship with the doctor.

§ You have no written working agreement in place with the doctor and the doctor is not governed by any award.

§ The doctor is free to work at other medical practices and has done so before however, as far as you are aware the doctor is not working anywhere else at this point in time.

§ The doctor's income is paid weekly. At the end of each week the money received from the doctor's clients is totalled and the doctor receives a percentage of this income.

§ The doctor is generally available for four sessions per week. However, the doctor is sometimes not available for any sessions.

§ The doctor dictates their availability to the practice without any consultation with the practice principal, such as days and hours of work.

§ The doctor advises of their unavailability, rather than applying for or requesting time off and has no limitations on the amount of leave taken or when it is taken.

§ If the doctor is away on leave, they do not organise anyone to take over their patients.

§ The doctor does not pay any overheads such as room rental, and does not pay for any consumables.

§ The doctor provides some of their own medical equipment, including a doctor's bag, with the practice providing the rest.

§ The doctor controls the number of patients seen and how they are treated.

§ The doctor and the medical practice both have their own insurance and indemnity cover.

§ The doctor is included in the practice's work cover insurance.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 section 12-35

Reasons for decision

Summary

Based on the information you have provided, the current working arrangement you have in place with the doctor is considered to be one of employer/employee and is not considered to be that of principal/independent contractor.

Detailed reasoning

The employer-employee relationship is a contractual one often referred to as a 'contract of service' which can be contrasted with a principal/independent contractor relationship typically referred to as a 'contract for services'. That is, an independent contractor generally contracts to achieve a result, whereas an employee contracts to provide labour (to enable the employer to achieve a result).

The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services.

A determination of whether an individual under a specific arrangement is an employee cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16: Income tax Pay As You Go withholding from payments to employees at paragraph 7 states:

'Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.'

The ruling has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

Control

The test for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. The importance of control lies not so much in its actual exercise as in the right of the employer to exercise it. This right is especially important in the context of skilled employment where the nature of the work leaves little scope for detailed control.

In your case, you control where the work is performed (at your medical practice) and who is to perform the work (the doctor you have employed), but have no control over how and when the work is performed. You state that the doctor can choose the days and the amount of hours they wish to work and that the doctor is free to work at other medical practices.

The lack of control over how the doctor performs their work is not an unusual occurrence for the industry. A doctor is considered a highly skilled worker and therefore it is unlikely that a practice manager would have control over how a doctor treats their patients. In addition, although you state that you do not have control over the doctor's working hours, this is due more to the necessity of the practice to retain the doctor's services rather than any lack of the right to control the doctor, as you state you basically accept what days and hours the doctor advises they will work.

This test indicates that the relationship is more likely to be that of employer/employee.

Integration or organisation test

In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payers business but the work is not integrated into the business rather is an accessory to it.

In your case, the work performed by the doctor could be considered as being integral to the business. The doctor does not invoice or charge clients on their own accord but instead, clients seen by the doctor are billed through the medical practice. The doctor performs the work at your medical practice and most consumables and required equipment is provided by the practice. This indicates that the doctor's work is integrated into the business and that the doctor is not carrying on a trade or business of their own.

This test indicates that the relationship is more likely to be that of employer/employee.

Results contracts

TR 2005/16 provides that where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services.

On the other hand, an employee, under a contract of service is generally paid according to an hourly rate, such as an award rate.

While payment for result is normally expected in a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis v. Vabu (2001) 207 CLR 21; 2001 ATC 4508; (2001) 47 ATR 559 considered that payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries.

In your case, there is no formal written agreement between the doctor and the practice about hours of work, pay, or leave entitlements. There is no indication that the doctor is required to meet any sort of quota of patients attended to, nor, produce a specified result at the end of a specified period. The doctor provides their labour to the practice and is remunerated each week by way of a percentage of the income taken by the practice from the doctor's patients.

This test indicates that the relationship is more likely to be that of employer/employee.

Delegation of work

The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contractor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee.

In your case, the doctor is hired by you to perform work at your medical practice. You advise that the doctor is not under any contractual agreement and has never enlisted a replacement doctor to cover their patients while on extended leave. In any case, in order for the doctor to be able to delegate or subcontract to another doctor, they would need to be able to bill the practice for the expense they incurred for hiring a replacement doctor. As the doctor does not invoice the practice for their time, the practice would actually need to have a direct agreement with any replacement doctor to perform the work, indicating that the doctor cannot delegate or subcontract their work under the current working arrangement.

This test indicates that the relationship is more likely to be that of employer/employee.

Risk

An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies.

In your case, due to the industry in question, both the practice and the doctor hold their own insurance and indemnity policies.

This test indicates that the relationship is more likely to be that of principal/independent contractor.

Provision of tools and equipment and payment of business expenses

Generally an independent contractor provides their own tools and equipment required to perform their services. There are situations where little or no tools of trade or plant and equipment are necessary to perform the work. An employee is usually reimbursed for expenses incurred in the course of employment.

In your case, the practice provides some of the equipment and all consumables required for the doctor to perform their work. However, the doctor does provide some of their own medical equipment in the form of a doctor's bag. The doctor does not contribute to the costs of any consumables used, nor do they pay any rent for the use of a consultancy room at the medical practice.

This test indicates that the relationship is more likely to be that of employer/employee.

Other indicators

§ the right to the exclusive services of the person engaged;

§ provision of benefits such as annual, sick and long service leave;

§ provision of other benefits prescribed under an award for employees; or

§ a requirement that a worker wear a company uniform.

In your case, you have the right to dismiss the doctor. However, you advise that you do not have the right to the exclusive services of the doctor as the doctor is free to work at other medical practices if they wish. You do not provide any benefits such as sick or annual leave, the doctor simply advises when they will be working and when they will be taking leave, however the doctor is included in your work cover insurance. There is no written contract in place between the practice and the doctor and therefore there are no other benefits provided to the doctor apart from the payment of superannuation. There is no indication that the doctor is required to wear a uniform.

The payment of superannuation and the right to dismiss the doctor indicate that the relationship is more likely to be that of employer/employee. However, as you do not have exclusive rights to services of the doctor and provide no other standard employment benefits such as sick and/or annual leave, the relationship could also be considered to be that of principal/independent contractor. Therefore, we consider that these 'other indicators' provide inconclusive evidence of the nature of the working relationship between the practice and the doctor.

Conclusion

On examination of the details of the working relationship against all the above factors and indicators, we consider that the arrangement, viewed as a whole, is that of an employer/employee and not one of principal/independent contractor.