Employee or contractor?

The High Court recently handed down two important decisions about the identification of employment and contracting relationships, which emphasises the importance of having comprehensive written agreements in place for practice employees and contracting doctors.

Until these decisions, the courts applied a “multi-factorial” approach when deciding whether a worker is an employee or a contractor. This approach considered how the parties conducted the relationship by looking at circumstances such as:

• whether the principal controlled how work was performed
• whether the worker had their own tools and equipment
• whether the worker conducted their own business, or was integrated into the business of a principal, etc.

The courts considered the terms of a written agreement between the parties but focused attention on the way the relationship worked in practice over time.

The High Court has now said that the terms of the written agreement between the parties are what the courts should primarily consider to determine whether a worker is an employee or contractor (provided the agreement is valid, enforceable and comprehensively sets out the rights and duties of the parties).

The conduct of the parties after the agreement is formed should not be considered. For example, if the agreement says that the worker is a contractor, is not entitled to leave, is required to pay GST and can choose their own hours of work, the courts will find the worker is a contractor even if the practice ultimately directs the worker’s work.

Handshake versus written agreement

Many medical practices and practitioners prefer a ‘handshake agreement’ over a comprehensive written agreement setting out the terms and conditions of the engagement.

We also regularly see written agreements that are based on an old precedent or an employment contract that the parties have attempted to use as the basis for a contractor agreement.

In recent years, written agreements have become an increasingly important tool to minimise the risk of medical practices being required to pay payroll tax or superannuation to contractors.  The recent High Court decisions make a written agreement even more important as the written agreement will now be the primary source used to determine whether a worker is an employee or contractor.

Key takeaways

• Practices should review their arrangements with contracted doctors.
• If there is no written agreement, the courts will continue to use the multi-factorial test to determine whether a worker is an employee or contractor.  To avoid uncertainty and unintended outcomes, practices should ensure there are accurate and comprehensive written agreements (i.e. that the doctor is found to be your employee, or you are required to pay payroll tax).
• If there are written agreements in place, your practice might need to consider whether those agreements properly characterise the doctor as a contractor and minimise the practice’s liability for payroll tax and superannuation. Your practice may need to have its agreements reviewed and updated.
• Be very clear on the terms you engage locum doctors to cover short term absences.
• The courts are unlikely to find that a doctor is an employee if the written agreement is with the doctor’s practice entity rather than the doctor personally.
• An increasingly common engagement model is to have the agreement set up so that the doctor engages the practice to provide practice management services to the doctor (rather than the practice engaging the doctor to provide medical services to the practice’s patients).